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SMC Global Power Holdings Corp.

155 EDSA, Wack-Wack, Mandaluyong City, Philippines

15,000,000,000.00 Fixed Rate Bonds consisting of


Series A Bonds: 4.3458% p.a. Due 2021,
Series B Bonds: 4.7575% p.a. Due 2023
and
Series C Bonds: 5.1792% p.a. Due 2026
Offer Price: 100% of Face Value
to be listed in the Philippine Dealing & Exchange Corp. (PDEx)

Joint Issue Managers, Joint Lead Underwriters and Bookrunners1

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE


SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE AND SHOULD BE
REPORTED IMMEDIATELY TO THE SECURITIES AND EXCHANGE COMMISSION.

The date of this Prospectus is June 23, 2016

The short term loan used to redeem the U.S.$300 million 7.0% Notes Due 2016 of the Corporation from BDO
Unibank, Inc., the parent company of BDO Capital and Investment Corporation, will be fully repaid from the net
proceeds of the Offer.

SMC Global Power Holdings Corp.


155 EDSA, Wack-Wack, Mandaluyong City, Philippines
Telephone Number: (632) 702 4500
This Prospectus relates to the offer and sale (the Offer) of fixed rate bonds (the Bonds) with
an aggregate principal amount of 15,000,000,000 of SMC Global Power Holdings Corp. (the
Company, the Issuer or SMC Global Power) to be listed and traded in the Philippine
Dealing & Exchange Corp. (PDEx). The Bonds will be issued on July 11, 2016 (the Issue
Date) and will be comprised of the Series A Bonds, the Series B Bonds, and the Series C
Bonds. While the Issuer has the discretion to allocate the principal amount among the Series A
Bonds, Series B Bonds and Series C Bonds based on the bookbuilding process, the Issuer may
opt not to allocate any of the principal amount to any of these series.
The Series A Bonds shall have a term of five (5) years from the Issue Date, with a fixed interest
rate equivalent to 4.3458% per annum. The Series B Bonds shall have a term of seven (7) years
from the Issue Date, with a fixed interest rate equivalent to 4.7575% per annum. The Series C
Bonds shall have a term of ten (10) years from the Issue Date, with a fixed interest equivalent to
5.1792% per annum. Interest on the Bonds shall be payable quarterly in arrears starting on
October 11, 2016 for the first Interest Payment Date, and January 11, April 11, July 11 and
October 11 of each year thereafter, for as long as the Bonds remain outstanding or the
subsequent Business Day without adjustment if such Interest Payment Date is not a Business
Day. For a more detailed discussion on the interest payments due on the Bonds, see
Description of the Bonds Interest of this Prospectus.
Subject to the consequences of default as may be contained in the Trust Agreement, and unless
otherwise redeemed or purchased prior to the relevant Maturity Date, the Bonds will be
redeemed at par or 100% of the face value thereof on the relevant Maturity Date. For a more
detailed discussion on the redemption of the Bonds, see Description of the Bonds
Redemption and Purchase of this Prospectus.
Upon issuance, the Bonds shall constitute direct, unconditional, unsubordinated, and unsecured
obligations of the Company and shall at all times rank pari passu and without preference among
themselves and among any present and future unsubordinated and unsecured obligations of the
Company, except for any statutory preference or priority established under Philippine law. The
Bonds will effectively be subordinated in right of payment to all of the secured debts of the
Company to the extent of the value of the assets securing such debt and all of its debts
evidenced by a public instrument under Article 2244(14) of the Civil Code of the Philippines. For
a more detailed discussion on the ranking of the Bonds, see Description of the Bonds
Ranking of this Prospectus.
The Bonds have been rated PRS Aaa by the Philippine Rating Services Corporation
(PhilRatings) on May 13, 2016. A rating is not a recommendation to buy, sell or hold securities
and may be subject to revision, suspension or withdrawal at any time by the rating agency
concerned.
The Bonds are offered to the public at face value through BDO Capital & Investment Corporation
(BDO Capital), BPI Capital Corporation (BPI Capital), China Bank Capital Corporation
(China Bank Capital), Maybank ATR Kim Eng Capital Partners, Inc. (MATRKE), PNB
Capital and Investment Corporation (PNB Capital), RCBC Capital Corporation (RCBC
Capital), SB Capital Investment Corporation (SB Capital), Standard Chartered Bank (SCB)
and United Coconut Planters Bank (UCPB), collectively the Joint Issue Managers, Joint
Lead Underwriters and Bookrunners. The Philippine Depository & Trust Corporation (PDTC
or Registrar and Paying Agent) will act as the Registrar of the Bonds. PDTC has no interest
or relation to the Company which may conflict with the performance of its function as Registrar of
the Bonds.

The Bonds will be issued in scripless form, with PDTC maintaining the electronic records of the
Registrar bearing the official information on the names and addresses of the Bondholders and
the number of Bonds they respectively hold, including all transfers of the Bonds and the names
of subsequent transferee Bondholders (the Register of Bondholders). The Bonds shall be
issued in minimum denominations of 50,000.00 each, and in integral multiples of 10,000.00
thereafter. The Bonds shall be traded in denominations of 10,000.00 in the secondary market.
The Company expects to raise gross proceeds amounting up to 15,000,000,000.00 and the net
proceeds are estimated to be at least 14,828,543,589 after deducting fees, commissions and
expenses relating to the issuance of the Bonds. The net proceeds of the Offer shall be used
primarily by the Company to refinance the U.S.$300 million short term loan extended by BDO
Unibank, Inc. (BDO) and for general corporate purposes. The Issuer shall source the U.S.
dollars to pay said short term loan from internally available funds. For a more detailed discussion
on the use of proceeds, see Use of Proceeds of this Prospectus.
Each investor in the Bonds must comply with all laws applicable to it and must obtain the
necessary consent, approvals or permission for its purchase, offer or sale under the laws and
regulations in force in any jurisdiction to which it is subject, and neither the Company nor the
Joint Issue Managers, Joint Lead Underwriters and Bookrunners shall have any responsibility
therefore.
The Company is organized under Philippine Law. The Company and its subsidiaries are allowed
under Philippine laws to declare dividends, subject to certain requirements. These requirements
include, for example, that the Board is authorized to declare dividends only from its unrestricted
retained earnings. Dividends may be payable in cash, shares or property, or a combination of
the three, as the Board shall determine. A cash dividend declaration does not require any further
approval from shareholders. The declaration of stock dividends is subject to the approval of
shareholders holding at least two-thirds of the outstanding capital stock of the Company. The
Board may not declare dividends which will impair its capital. The Company and its subsidiaries
declare dividends as determined by the Board, taking into consideration factors such as the
implementation of business plans, debt service requirements, operating expenses, budgets,
funding for new investments and acquisitions and appropriate reserves and working capital. For
a more detailed discussion on the use of proceeds, see Dividend Policy of this Prospectus.
Each of the Joint Issue Managers, Joint Lead Underwriters and Bookrunners will receive a fee
from the Company of 0.50% based on their respective underwriting commitments, which shall be
grossed up for gross receipts tax of 7%. For a more detailed discussion on the fees to be
received by the Joint Issue Managers, Joint Lead Underwriters and Bookrunners, see Plan of
Distribution of this Prospectus.
BDO Capital is a wholly-owned subsidiary of BDO which will receive full payment out of the
proceeds of the Offer as the lender under the short term loan. For a more detailed discussion on
the use of proceeds, see Use of Proceeds of this Prospectus.
On April 18, 2016, the Company filed a registration statement with the Securities and Exchange
Commission of the Philippines (SEC), in accordance with the Securities Regulation Code
(SRC) for the registration of the Bonds.
The information contained in this Prospectus relating to the Company, its operations and those
of its subsidiaries and affiliates has been supplied by the Company, unless otherwise stated
herein. To the best of its knowledge and belief, the Company (which has taken all reasonable
care to ensure that such is the case) confirms that the information contained in this Prospectus
relating to it, its operations and those of its subsidiaries and affiliates is correct, and that there is
no material misstatement or omission of fact which would make any statement in this Prospectus
misleading in any material respect and that the Company hereby accepts full and sole
responsibility for the accuracy information contained in this Prospectus with respect to the same.

The Joint Issue Managers, Joint Lead Underwriters and Bookrunners confirm that they have
exercised the required due diligence in verifying that all material information in this Prospectus is
true and that no material information was omitted, which was necessary in order to make the
statements contained in said documents not misleading. The Joint Issue Managers, Joint Lead
Underwriters and Bookrunners assume no liability for any information supplied by the Company
in relation to this Prospectus.
Unless otherwise indicated, all information in this Prospectus is as of the date of this Prospectus.
Neither the delivery of this Prospectus nor any sale made pursuant to this Prospectus shall,
under any circumstance, create any implication that the information contained herein is correct
as of any date subsequent to the date hereof or that there has been no change in the affairs of
the Company since such date.
No representation or warranty, express or implied, is made or given by the Joint Issue
Managers, Joint Lead Underwriters and Bookrunners, the Trustee or the Registry and Paying
Agent or their respective affiliates or legal advisers as to the accuracy, completeness or
sufficiency of the information contained in this Prospectus, and nothing contained in this
Prospectus is, or shall be relied upon as, a promise, representation or warranty by the Joint
Issue Managers, Joint Lead Underwriters and Bookrunners, the Trustee or the Registry and
Paying Agent or their respective affiliates or legal advisers. This Prospectus is not intended to
provide the basis of any credit or other evaluation nor should it be considered as a
recommendation by either the Issuer, the Joint Issue Managers, Joint Lead Underwriters and
Bookrunners, the Trustee or the Registry and Paying Agent or their respective affiliates or legal
advisers that any recipient of this Prospectus should purchase the Bonds.
No person has been authorized to give any information or to make any representation not
contained in this Prospectus. If given or made, any such information or representation must not
be relied upon as having been authorized by the Company or any of the Joint Issue Managers,
Joint Lead Underwriters and Bookrunners. This Prospectus does not constitute an offer of any
securities, or any offer to sell, or a solicitation of any offer to buy any of the securities of the
Company in any jurisdiction, to or from any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
Before making an investment decision, investors must rely on their own examination of the
Company and the terms of the Offer, including the risks involved. These risks include:
risks related to the Companys business;
risks relating to the Philippines;
risks relating to the Offer and the Bonds.
There can be no assurance in respect of: (i) whether the Company would issue such debt
securities at all; (ii) the size or timing of any individual issuance or the total issuance of such debt
securities; or (iii) the specific terms and conditions of any such issuance. Any decision by the
Company to offer such debt securities will depend on a number of factors at the relevant time,
many of which are not within the control of the Company, including but not limited to: prevailing
interest rates, the financing requirements of business and prospects of the Company, market
liquidity and the state of the domestic capital market, and the Philippine, regional and global
economies in general.
The price of securities can and does fluctuate, and any individual security may experience
upward or downward movements, and may even become valueless. There is an inherent risk
that losses may be incurred rather than profit made as a result of buying and selling securities.
An investment in the Bonds described in this Prospectus involves a certain degree of risk. A
prospective purchaser of the Bonds should carefully consider several factors inherent to the
Company such as risks pertinent to the industry and operational risks relevant to the Philippines
vis--vis risks inherent to the Bonds, in addition to the other information contained in this
Prospectus, in deciding whether to invest in the Bonds.

For a more detailed discussion on the risks in investing in the Bonds, see the section entitled
Risk Factors, which, while not intended to be an exhaustive enumeration of all the risks, must
be considered in connection with any investment in or any purchase of the Bonds.
The Companys financial statements are reported in Pesos and are prepared based on its
accounting policies, which are in accordance with the Philippine Financial Reporting Standards
(PFRS) issued by the Financial Reporting Standard Council of the Philippines. PFRS include
statements named PFRS and Philippine Accounting Standards, and Philippines Interpretations
from International Financial Reporting Interpretations Committee.
Figures in this Prospectus have been subject to rounding adjustments. Accordingly, figures
shown in the same item of information may vary, and figures which are totals may not be an
arithmetic aggregate of their components.
The Companys fiscal year begins on January 1 and ends on December 31 of the year. R.G.
Manabat & Co., a member firm of KPMG (R.G. Manabat & Co.), the Companys external
auditor, has audited and rendered an unqualified audit reports on the Companys financial
statements as of and for the years ended December 31, 2013, 2014 and 2015.
Market data and certain industry information used throughout this Prospectus were obtained
from internal surveys, market research, publicly available information and industry publications.
Industry publications generally state that the information contained therein has been obtained
from sources believed to be reliable, but that the accuracy and completeness of such information
is not guaranteed. Similarly, internal surveys, industry forecasts and market research, while
believed to be reliable, have not been independently verified and neither the Company nor any
of the Joint Issue Managers, Joint Lead Underwriters and Bookrunners makes any
representation as to the accuracy and completeness of such information.
This Prospectus includes forward-looking statements. The Company has based these forwardlooking statements largely on its current expectations and projections about future events and
financial trends affecting its business. Words including, but not limited to, believes, may, will,
estimates, continues, anticipates, intends, expects and similar words are intended to
identify forward-looking statements. In light of the risks and uncertainties associated with
forward-looking statements, investors should be aware that the forward looking events and
circumstances discussed in this Prospectus might not occur. The actual results of the Company
could differ substantially from those anticipated in the forward-looking statements of the
Company.

No representation or warranty, express or implied, is made by the Company and the Joint Issue
Managers, Joint Lead Underwriters and Bookrunners, regarding the legality of an investment in
the Bonds under any legal, investment or similar laws or regulations. The contents of this
Prospectus are not investment, legal or tax advice. Prospective investors should consult their
own counsel, accountant and other advisors as to legal, tax, business, financial and related
aspects of a purchase of the Bonds. In making any investment decision regarding the Bonds,
prospective investors must rely on their own examination of the Company and the terms of the
Offer, including the merits and risks involved. Any reproduction or distribution of this Prospectus,
in whole or in part, and any disclosure of its contents or use of any information herein for any
purpose other than considering an investment in the Offer is prohibited.
The Company reserves the right to withdraw the offer and sale of the Bonds at any time, and the
Joint Issue Managers, Joint Lead Underwriters and Bookrunners reserve the right to reject any
commitment to subscribe for the Bonds in whole or in part and to allot to any prospective
purchaser less than the full amount of the Bonds sought by such purchaser. If the Offer is
withdrawn or discontinued, the Company shall subsequently notify the SEC and the PDEx.
Conventions which apply to this Prospectus
In this Prospectus, unless otherwise specified or the context otherwise requires, all references to
the Company are to the Company and its subsidiaries and affiliates (or the Company and any
one or more of its subsidiaries or affiliates, as the context may require). All references to the
Philippines are references to the Republic of the Philippines. All references to the
Government are to the national and local government of the Philippines, including any of its
departments, agencies, or other instrumentalities.
The items expressed in the Definition of Terms may be defined otherwise by appropriate
government agencies or regulations from time to time, or by conventional or industry usage.

TABLE OF CONTENTS
DEFINITION OF TERMS ................................................................................................................................9
EXECUTIVE SUMMARY ..............................................................................................................................19
SUMMARY OF THE OFFERING .................................................................................................................26
RISK FACTORS AND OTHER CONSIDERATIONS ...................................................................................30
USE OF PROCEEDS ...................................................................................................................................48
DETERMINATION OF OFFER PRICE.........................................................................................................49
PLAN OF DISTRIBUTION ............................................................................................................................50
DESCRIPTION OF THE BONDS .................................................................................................................56
INTERESTS OF NAMED EXPERTS ............................................................................................................79
DESCRIPTION OF BUSINESS ....................................................................................................................80
DESCRIPTION OF PROPERTIES .............................................................................................................115
CERTAIN LEGAL PROCEEDINGS ............................................................................................................116
MARKET PRICE AND DIVIDENDS ON COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS ....................................................................................................119
MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION ..........................................................................................121
MANAGEMENT AND CERTAIN SECURITY HOLDERS...........................................................................134
EXECUTIVE COMPENSATION .................................................................................................................138
SECURITY OWNERSHIP OF CERTAIN RECORD AND BENEFICIAL OWNERS...................................139
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ..............................................................141
DESCRIPTION OF DEBT...........................................................................................................................142
CORPORATE GOVERNANCE ..................................................................................................................143
REGULATORY FRAMEWORK ..................................................................................................................145
PHILIPPINE TAXATION .............................................................................................................................160
FINANCIAL INFORMATION .......................................................................................................................164

DEFINITION OF TERMS
In this Prospectus, unless the context otherwise requires, the following terms shall have the
meanings set out below:
ACA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Automatic Cost Adjustment Mechanism.

Actual Energy Generated . . . . . . . . . . . . . . . . . .

Actual output of the power plant measured in GWh,


MWh or KWh attributable to the contracted capacity
of the Sual Power Plant, San Roque Power Plant or
Ilijan Power Plant, as applicable.

AFP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Armed Forces of Philippines.

AHC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Angat Hydropower Corporation.

AHEPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Angat Hydroelectric Power Plant.

ALECO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Albay Electric Cooperative, Inc.

Allocation Plan . . . . . . . . . . . . . . . . . . . . . . . . . .

Agreed on procedure for application, acceptance, or


rejection of the Applications to Purchase, whether in
whole or in part.

APEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Albay Power and Energy Corp.

ASEAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Association of Southeast Asian Nations, including


Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, the Philippines, Singapore, Thailand and
Vietnam.

Average Net Dependable Capacity . . . . . . . . . . .

Average for any given period of the Net Dependable


Capacity within that period, expressed in MW.

Availability Factor . . . . . . . . . . . . . . . . . . . . . . . .

Ratio, in percent, equal to (1)(a) the number of


hours in a period (e.g., a month or a year) less (b)
the average number of hours of planned and
unplanned outages during that period, divided by (2)
the number of hours in that period.

Auxiliary Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . .

One of the three 6 MW capacity hydroelectric


generators of AHEPP.

Bayan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bayan Resources TBK.

BDO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

BDO Unibank, Inc.

BER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Basic Energy Rate.

BERA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Basic Energy Rate Adjustment.

Board of Directors or Directors . . . . . . . . . . . . . .

Board of Directors of SMC Global Power.

BOI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Board of Investments.

Bonanza Energy . . . . . . . . . . . . . . . . . . . . . . . . .

Bonanza Energy Resources, Inc.


9

Bondholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A Person whose name appears, at any time, as a


holder of the Bonds in the Register of Bondholders.

Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Philippine Peso denominated fixed rate bonds


with terms of five, seven and ten years to be issued
by the Issuer with an aggregate principal amount of
[15,000,000,000.00] consisting of Series A Bonds,
Series B Bonds and Series C Bonds, which the Joint
Issue Managers, Joint Lead Underwriters and
Bookrunners have agreed to distribute on the Issue
Date, and underwrite on a firm commitment basis,
with features set out in the Terms and Conditions.

BOT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Build-Operate-Transfer.

BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bangko Sentral ng Pilipinas.

Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . .

means a day, other than Saturday, Sunday or legal


holiday, on which the facilities of the Philippine
banking system are open and available for clearing,
and banks are open for business in Metro Manila,
Philippines.

Captive Market . . . . . . . . . . . . . . . . . . . . . . . . . .

A market of end-users who do not have a choice of


their supplier of electricity.

CFB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Circulating fluidized bed.

Clean Air Act . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Philippine Clean Air Act of 1999.

Clean Water Act . . . . . . . . . . . . . . . . . . . . . . . . .

The Philippine Clean Water Act of 2004.

COC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Coal operating contract.

COD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commercial Operations Date.

Company, Issuer, or SMC Global Power . . . . . .

SMC Global Power Holdings Corp. including, as the


context requires, its subsidiaries.

Contestable Customers . . . . . . . . . . . . . . . . . . . .

End-users who have a choice on their supplier of


electricity as may be certified by the ERC.

Contestable Market . . . . . . . . . . . . . . . . . . . . . . .

A market of end-users who have a choice on their


supplier of electricity.

Daguma Agro . . . . . . . . . . . . . . . . . . . . . . . . . . .

Daguma Agro Minerals, Inc.

Davao Greenfield Power Plant . . . . . . . . . . . . . .

The 2 x 150 MW Davao coal-fired power plant.

DENR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Department of Environment and Natural Resources.

Distribution Code . . . . . . . . . . . . . . . . . . . . . . . .

The Philippine Distribution Code.

DOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ASEAN-China Declaration on
Parties in the South China Sea.
10

the

Conduct

of

DOE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Department of Energy of the Philippines.

DOJ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Department of Justice of the Philippines.

DOLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Department of Labor and Employment.

DU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Distribution Utility.

EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Earnings before interest, taxes, depreciation and


amortization.

EC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Electric Cooperatives.

ECA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Energy conversion agreement.

ECC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Environmental Compliance Certificate.

EIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Environmental Impact Statement.

EMB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Environmental Management Bureau.

EMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Environmental Monitoring Fund.

EMP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Environmental Management Plan.

EPIRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Philippine Republic Act No. 9136, otherwise known


as the Electric Power Industry Reform Act of 2001.

EPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Engineering, Procurement and Construction.

ERC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Energy Regulatory Commission of the Philippines.

ER Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Equivalent relief claim.

ERC Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The order dated March 3, 2014 issued by the ERC


which voided the WESM prices for the November and
December 2013 billing months and imposed
recalculated prices to be calculated by PEMC.

FIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Foreign Investment Act of 1991 of the Philippines.

GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross domestic product.

Government . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Government of the Philippines.

Grid Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Philippine Grid Code.

GWh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gigawatt hours, a unit of electrical energy equivalent


to 1,000 MWh.

Ilijan ECA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The ECA under which NPC is required to deliver and


supply to KEILCO the fuel necessary to operate the
Ilijan Power Plant.
11

Ilijan IPPA Agreement . . . . . . . . . . . . . . . . . . . . .

The IPPA agreement dated May 11, 2010 between


PSALM and SPPC with the conformity of the NPC
relative to the administration of the IPP contract of
NPC for the Ilijan Power Plant.

Ilijan Power Plant . . . . . . . . . . . . . . . . . . . . . . . .

Natural gas fired combined cycle power plant with


contracted capacity of 1,200 MW located in Ilijan,
Batangas.

IMEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interim Mindanao Electricity Market.

Installed Capacity . . . . . . . . . . . . . . . . . . . . . . . .

Gross maximum dependable capacity of a power


plant, expressed in MW, i.e., the maximum amount of
power that can be generated by the power plant.

IPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Independent Power Producer.

IPPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Independent Power Producer Administrator.

IPPA Agreement . . . . . . . . . . . . . . . . . . . . . . . . .

Independent
Agreement.

IPPA Power Plants . . . . . . . . . . . . . . . . . . . . . . .

The Sual Power Plant, the San Roque Power


Plant and the Ilijan Power Plant.

IRR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Implementing Rules and Regulations of


promulgated on February 27, 2002.

ISO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

International Organization for Standardization.

Issue Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

July 11, 2016 or such date on which the Bonds shall


be issued by SMC Global Power to the Bondholders.

ITH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income Tax Holiday.

Joint Issue Managers, Joint Lead Underwriters


and Bookrunners . . . . . . . . . . . . . . . . . . . . . . . . .

BDO Capital, BPI Capital, China Bank Capital,


MATRKE, PNB Capital, RCBC Capital, SB Capital,
SCB and UCPB.

K-Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Korea Water Resource Corporation.

Kcal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Kilo-Calorie, a unit of heat energy.

KEILCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

KEPCO Ilijan Corporation, owner of the Ilijan Power


Plant, which is a joint venture of KEPCO, Mitsubishi
Corporation and TeaM Energy.

KEPCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Korea Electric Power Corporation.

KJ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Kilo-Joule, a unit of heat energy.

KPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Kaltim Prima Coal.

kV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Kilo-Volts, a unit of voltage equivalent to 1,000 volts.

12

Power

Producer

Administration

EPIRA

KW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Kilowatt, a unit of electrical power equivalent to 1,000


watts.

KWh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Kilowatt hours, a unit of electrical energy equivalent


to 1,000 watt hours.

LGC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Philippine Republic Act No. 7160, or the Local


Government Code.

LGU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Local Government Unit.

LHV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Lower heating value of fuel.

Limay Combined Cycle Plant . . . . . . . . . . . . . . .

The combined cycle power plant with installed


capacity at 620 MW located in Limay, Bataan which
was owned by Panasia Energy.

Limay Greenfield Power Plant . . . . . . . . . . . . . . .

The 2 x 150 MW Limay coal-fired power plant.

Limay Cogeneration Plant . . . . . . . . . . . . . . . . . .

The 140 MW Limay cogeneration power plant.

Luzon grid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

An interconnected network of transmission lines


running through Luzon for delivering electricity.

Main Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

One of the four 50 MW capacity main hydroelectric


generators of AHEPP.

Maturity Dates . . . . . . . . . . . . . . . . . . . . . . . . . . .

For the Series A Bonds, July 11, 2021, which is five


(5) years from Issue Date, for the Series B Bonds,
July 11, 2023, which is seven (7) years from Issue
Date and for the Series C Bonds, July 11, 2026, which
is ten (10) years from the Issue Date; provided that, in
the event that any of the Maturity Dates falls on a day
that is not a Business Day, the Maturity Date shall be
automatically extended to the immediately succeeding
Business Day.

Meralco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Manila Electric Company.

MILF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Moro Islamic Liberation Front.

Mindanao grid . . . . . . . . . . . . . . . . . . . . . . . . . . .

An interconnected network of transmission lines


running through Mindanao for delivering electricity.

MNLF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Moro National Liberation Front.

Must Pay Volume . . . . . . . . . . . . . . . . . . . . . . . .

The monthly generation payments SMC Global


Power must pay for electricity sold up to a given
volume.

MW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Megawatt, a unit of electrical power equivalent to


1,000 kilowatts.

MWh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Megawatt hours, a unit of electrical


equivalent to 1,000 kilowatt hours.

MWSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Metropolitan Waterworks and Sewerage System.


13

energy

NEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

National Electrification
Philippines.

Negative List . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tenth Regular Foreign Investment Negative List


issued by the Office of the President of the Philippines
on May 29, 2015.

Net Capacity Factor . . . . . . . . . . . . . . . . . . . . . .

Ratio, in percent, equal to (1) actual electricity


generated by a power plant in a period (net of
electricity utilized to drive power plant service or
auxiliaries), divided by (2)(a) number of hours in the
period multiplied by (b) the contracted capacity of
such power plant.

Net Dependable Capacity . . . . . . . . . . . . . . . . . .

Gross dependable capacity of a power plant (which


may be less than Installed Capacity at any given time
if technical problems are present) less the power plant
capacity utilized to drive power plant station service or
auxiliaries, expressed in MW.

Net Heat Rate . . . . . . . . . . . . . . . . . . . . . . . . . . .

Heat energy required by a power plant to produce


one KWh of electrical energy net of the parasitic or
auxiliary loads of the power plant, usually expressed
in terms of British Thermal Units/KWh, Kcal/KWh or
KJ/KWh.

NGCP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

National Grid Corporation of the Philippines, the


system operator of the transmission grid.

NIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

National Irrigation Administration.

NPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

National Power Corporation of the Philippines.

NWRB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

National Water Resources Board.

OEDC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Olongapo Electricity Distribution Company, Inc.

Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The issuance of Bonds by the Issuer under the


conditions as herein contained.

Offer Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The period, commencing from 9:00 AM of June 27,


2016 to 12:00 NN of July 1, 2016, during which the
Bonds shall be offered to the public.

Open Access . . . . . . . . . . . . . . . . . . . . . . . . . . . .

System of allowing qualified persons to use the


transmission and/or distribution systems and
associated facilities of distribution utilities subject to
the payment of transmission and/or distribution
wheeling rates approved by the ERC.

Panasia Energy . . . . . . . . . . . . . . . . . . . . . . . . . .

Panasia Energy Holdings Inc.

Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . .

Each date on which payment for interest, principal,


and all other payments due on the Bonds become
due.

PBR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Performance Based Regulation.


14

Administration

of

the

PDEx . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Philippine Dealing & Exchange Corp.

PDTC or Registrar and Paying Agent or


Registrar of the Bonds . . . . . . . . . . . . . . . . . . . .

The Philippine Depository & Trust Corporation, the


central depository and clearing agency of the
Philippines which provides the infrastructure for
handling the lodgment of the scripless Bonds and the
electronic book-entry transfers of the lodged Bonds in
accordance with the PDTC Rules, and its successorin-interest.

PDTC Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The SEC-approved rules of the PDTC, including the


PDTC Operating Procedures and PDTC Operating
Manual, as may be amended, supplemented, or
modified from time to time.

PEMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Philippine Electricity Market Corporation.

PFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Philippine Financial Reporting Standards.

Philippine peso or PhP or Pesos or . . . . . . . . .

The legal currency of the Republic of the Philippines.

Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Republic of the Philippines.

PhilRatings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Philippine Rating Services Corporation.

PPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Power purchase agreement.

PSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Power supply agreement.

PSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Philippine Stock Exchange, Inc.

PSALM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Power Sector Assets and Liabilities Management


Corporation.

PSALM ER Claim . . . . . . . . . . . . . . . . . . . . . . . .

The ER Claim included in PSALMs claims against


TeaM Energy.

PSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Power supply contract.

PVEI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PowerOne Ventures Energy Inc.

RCOA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Retail Competition and Open Access.

RE Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Renewable Energy Act of 2008 (Republic Act No.


9513).

Register of Bondholders . . . . . . . . . . . . . . . . . . .

The electronic records of the Registrar bearing the


official information on the names and addresses of
the Bondholders and the amount of Bonds they
respectively hold, including all transfers and
assignments or any Liens or encumbrances thereon
and the names of subsequent transferee
Bondholders.

Reliability Factor . . . . . . . . . . . . . . . . . . . . . . . . .

Ratio, in percent, equal to (1)(a) the number of hours


15

in a period less (b) the average unplanned outage


hours in that period divided by (2) the number of
hours in that period.
RES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Retail Electricity Supplier.

R.G. Manabat & Co. . . . . . . . . . . . . . . . . . . . . . .

R.G. Manabat & Co., a member firm of KPMG.

RMP-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Refinery Master Plan 2.

RPAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Registry and Paying Agency Agreement.

RSCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Retail supply contracts.

RTGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Philippine Payment Settlement System via Real


Time Gross Settlement.

SAF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Special Action Force of the Philippine National Police.

Sanitation Code . . . . . . . . . . . . . . . . . . . . . . . . . .

The Code on Sanitation of the Philippines.

San Roque IPPA Agreement . . . . . . . . . . . . . . .

The IPPA Agreement dated December 29, 2009


between PSALM and SPDC with the conformity of
NPC relative to the administration of the IPP contract
of NPC for the San Roque Power Plant.

San Roque Power Plant . . . . . . . . . . . . . . . . . . .

Hydroelectric multipurpose power plant with


contracted capacity of 345 MW located in San
Manuel, Pangasinan.

San Roque PPA . . . . . . . . . . . . . . . . . . . . . . . . .

The PPA made between SPDC and NPC dated


October 11, 1997 in relation to the San Roque Power
Plant.

SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Securities and Exchange Commission of the


Philippines.

Series A Bonds . . . . . . . . . . . . . . . . . . . . . . . . . .

Bonds to be issued by the Issuer having a term


beginning on the Issue Date and ending five (5) years
from Issue Date or on July 11, 2021 with a fixed
Interest Rate equivalent to 4.3458% per annum.

Series B Bonds . . . . . . . . . . . . . . . . . . . . . . . . . .

Bonds to be issued by the Issuer having a term


beginning on the Issue Date and ending seven (7)
years from Issue Date or on July 11, 2023 with a fixed
Interest Rate equivalent to 4.7575% per annum.

Series C Bonds . . . . . . . . . . . . . . . . . . . . . . . . . .

Bonds to be issued by the Issuer having a term


beginning on the Issue Date and ending ten (10)
years from Issue Date or on July 11, 2026 with a fixed
Interest Rate equivalent to 5.1792% per annum.

SMEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

San Miguel Energy Corporation.

SMELC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

San Miguel Electric Corp.

SPDC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Strategic Power Devt. Corp.


16

SPI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SMC PowerGen, Inc.

SPPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

South Premiere Power Corp.

SRC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Securities Regulation Code of the Philippines


(Republic Act No. 8799) and its implementing rules,
as amended.

SRPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

San Roque Power Corporation, operator of the San


Roque power plant.

SSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Social Security System.

Sual ECA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Energy Conversion Agreement dated September 2,


2009 made between NPC and CEPA Pangasinan
Electric Limited for the Coal-Fired Thermal Power
Station at Sual, Pangasinan, Philippines.

Sual IPPA Agreement . . . . . . . . . . . . . . . . . . . . .

The IPPA Agreement dated September 2, 2009 made


between PSALM and SMEC with the conformity of
NPC relative to the administration of the IPP contract
of NPC for the Sual Power Plant.

Sual Power Plant . . . . . . . . . . . . . . . . . . . . . . . . .

Coal-fired power plant with a contracted capacity of


1,000 MW located in Sual, Pangasinan.

Sultan Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sultan Energy Phils. Corp.

Take-or-pay. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A type of contractual arrangement where, or the act


whereby, a customer either takes a product at a
certain price from the supplier, or pays the supplier a
penalty.

Tax Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The National Internal Revenue Code of 1997.

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Any present or future taxes, including, but not limited


to, documentary stamp tax, levies, imposts, filing and
other fees or charges imposed by the Republic of the
Philippines or any political subdivision or taxing
authority thereof, including surcharges, penalties and
interests on said taxes, but excluding final withholding
tax, gross receipts tax, taxes on the overall income of
the underwriter or of the Bondholders, value added
tax, and taxes on any gains realized from the sale of
the Bonds.

TeaM Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TeaM Sual Corporation, owner of the Sual Power


Plant, which is a joint venture between Marubeni
Corporation and Tokyo Electric Power Corporation.

TransCo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

National Transmission Corporation.

TRO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Temporary restraining order.

Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Philippine National Bank Trust Banking Group.

Underwriting Agreement . . . . . . . . . . . . . . . . . . .

Underwriting Agreement in the agreed form dated on


17

or about June 23, 2016 between the Issuer and the


Joint Issue Managers, Joint Lead Underwriters and
Bookrunners, as may be amended or supplemented
from time to time.
Unplanned Outage . . . . . . . . . . . . . . . . . . . . . . .

A shutdown of the plant for reasons other than


planned outage. For purposes of calculating
measures of power plant performance that are
reported by the IPPs such as availability and reliability
factors, shutdown due to (1) faults or failures in
the transmission system, (2) force majeure events,
(3) disruptions in fuel supply and (4) dispatch orders
from the grid system operators are not included in
unplanned outage.

Visayas grid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An interconnected network of transmission lines


running through Visayas for delivering electricity.
WESM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Wholesale electricity spot market.

18

EXECUTIVE SUMMARY
The following summary is qualified in its entirety by, and is subject to, the more detailed
information and the consolidated financial statements of SMC Global Power and notes relating
thereto. For a discussion of certain matters that should be considered in evaluating an
investment in the Bonds, see the section of this Prospectus entitled Risk Factors and Other
Considerations. Investors are recommended to read this entire Prospectus carefully.
In this Prospectus, unless otherwise specified or the context otherwise requires, all references
to the Company are to the Company and its subsidiaries and affiliates (or the Company and
any one or more of its subsidiaries or affiliates, as the context may require).

BUSINESS
SMC Global Power is a holding company which owns subsidiaries that are primarily
engaged in the generation, supply and sale of electric power in the Philippines. SMC Global
Power, together with its subsidiaries, is one of the largest power companies in the Philippines,
controlling 2,903 megawatts (MW) of combined capacity as of December 31, 2015 and which
benefits from diversified fuel sources, including natural gas, coal and hydroelectric. Based on the
installed generating capacities in the Energy Regulatory Commission of the Philippines (ERC)
Resolution No. 03, Series of 2015, SMC Global Power, through its Independent Power
Producer Administrator (IPPA) and Independent Power Producer (IPP) subsidiaries, had a
17% market share of the power supply of the national grid, and a 22% market share of the
Luzon grid, in each case as of December 31, 2015.2 SMC Global Power entered the power
industry in 2009 following the acquisition of IPPA rights in privatization auctions conducted by
the Government. Under the IPPA business model, SMC Global Power, through its subsidiaries
San Miguel Energy Corporation (SMEC), Strategic Power Devt. Corp. (SPDC), and South
Premiere Power Corp. (SPPC), gained the right to sell electricity generated by the power plants
owned and operated by the IPPs without having to bear any of the large upfront capital
expenditures for power plant construction or maintenance. As an IPPA, each of SMEC, SPDC
and SPPC also has the ability to manage both market and price risk by entering into bilateral
contracts with offtakers while capturing potential upside from the sale of excess capacity through
the Wholesale Electricity Spot Market (WESM").
SMC Global Power, through SMEC, SPDC and SPPC, controls the 2,545 MW combined
contracted capacity of the Sual, San Roque and Ilijan Power Plants, respectively (collectively,
the IPPA Power Plants) through their Independent Power Producer Administration
Agreements ( IPPA Agreements). SMEC acquired the IPPA rights for the Sual Power Plant in
November 2009, SPDC for the San Roque Power Plant in January 2010 and SPPC for the Ilijan
Power Plant in June 2010. The Sual Power Plant is a coal-fired thermal power plant, the San
Roque Power Plant is a hydro-electric power plant, and the Ilijan Power Plant is a natural gasfired combined cycle power plant.
In September 2013, SMC Global Power through SMC PowerGen, Inc. (SPI) acquired 100%
of the 140 MW Limay Cogeneration Power Plant (the Limay Cogeneration Plant) from
Petron Corporation. In November 2014, SMC Global Power through its subsidiary, PowerOne
Ventures Energy Inc. (PVEI) acquired a 60% stake in Angat Hydropower Corporation (AHC),
the owner and operator of the 218 MW Angat Hydroelectric Power Plant (AHEPP). As at
December 31, 2015, the total capacity of the subsidiaries of SMC Global Power is 2,903
MW including the entire capacity of the AHEPP.
SMC Global Power, through SMEC, SPDC, SPPC, AHC and SPI, sells power through offtake
agreements directly to customers, including Manila Electric Company (Meralco) and other
2

Market share is computed by dividing the total capacity of the Company (2,903,000 KW) with the installed generating
capacity of Luzon grid or National grid (13,057,758 KW and 17,585,167 KW, respectively) from ERC Resolution No. 3
Series of 2015.
19

distribution utilities, electric cooperatives and industrial customers, or through the WESM. The
majority of the consolidated sales of SMC Global Power are through long-term Take-or-pay
offtake contracts which have provisions for passing on fuel costs and certain other fixed costs.
In April 2013, SMC Global Power, through SMC Power Generation Corp., acquired a 35% equity
stake in Olongapo Electricity Distribution Company, Inc. (OEDC). In October 2013, SMC
Global Power entered into a 25-year concession agreement with Albay Electric Cooperative, Inc.
(ALECO). It became effective upon the confirmation of the National Electrification
Administration of the Philippines (NEA) in November 2013. SMC Global Power organized and
established a fully-owned and controlled subsidiary, Albay Power and Energy Corp. (APEC),
which assumed, as the concessionaire, all the rights and interests and performs the obligations
of SMC Global Power under the concession agreement with ALECO.
During the years ended December 31, 2013, 2014 and 2015, respectively, SMC Global Power
through its subsidiaries sold 13,316 Gigawatt hours (GWh), 14,891 GWh, and 14,714 GWh of
power pursuant to offtake agreements and 2,847 GWh, 2,110 GWh, and 1,844 GWh of power
through the WESM. In contrast, during the years ended December 31, 2013, 2014 and 2015,
respectively, SMC Global Power through its subsidiaries purchased 517 GWh, 477 GWh, and
690 GWh of power from the WESM.
For the year ended December 31, 2015, the total consolidated revenue, net income and
earnings before interest, taxes, depreciation and amortization (EBITDA) of SMC Global
Power were 77.5 billion, 1.8 billion and 5.5 billion, respectively, while as of December 31,
2015, SMC Global Power had total consolidated assets of 331.2 billion.
The experience of SMC Global Power, through its subsidiaries, in acting as an IPPA and its
ownership of the Limay Cogeneration Plant and the AHEPP have enabled SMC Global Power to
gain expertise in the Philippine power generation industry. With this experience, SMC Global
Power believes it has a strong platform to participate in the expected future growth of the
Philippine power market, through both the development of greenfield power projects and the
acquisition of existing power generation capacity. SMC Global Power, as the project sponsor,
initiated two greenfield power projects in July 2013 and October 2013 with the construction of
the 2 x 150 MW Davao coal-fired power plant (the Davao Greenfield Power Plant) and the 4 x
150 MW Limay coal-fired power plant (the Limay Greenfield Power Plant), respectively. SMC
Global Power, through Mariveles Power Generation Corporation, will also construct an
additional greenfield coal-fired power project in Mariveles, Bataan with an initial capacity of 4
x 150 MW. SMC Global Power is considering the further expansion of its power portfolio of
additional capacity nationwide through greenfield power projects over the next few years,
depending on market demand. With the increased development of greenfield power projects
from 2016 onwards, an increasing portion of the portfolio of SMC Global Power is expected from
Company-owned and Company-operated IPPs. In order to continue its strategic acquisitions of
existing power generation capacity, SMC Global Power intends to participate in the bidding of
selected National Power Corporation of the Philippines (NPC)-owned power generation plants
that are scheduled for privatization as asset sales or under the IPPA framework. SMC Global
Power also intends to pursue vertical integration of its power business by expanding into
businesses along the power sector value chain that complement its current power generation
operations. Such vertical integration would encompass both upstream vertical integration
(integration of power generation with fuel suppliers) and downstream vertical integration
(integration of power generation with distribution and supply operations). SMC Global Power
also intends to pursue downstream vertical integration by capitalizing on changes in the
Philippine regulatory structure to expand its sales of power to a broader range of customers,
including retail customers. In August 2011, as part of the reorganization of the power-related
businesses of San Miguel Corporation, SMC Global Power acquired from San Miguel
Corporation a 100% equity interest in San Miguel Electric Corp. (SMELC), which holds a
Retail Electricity Supplier (RES) license from the ERC. With open access and retail competition
already implemented, the RES license will allow SMC Global Power, through SMELC, to enter
into retail supply contracts (RSCs) with end-users who have a choice on their supplier of
electricity as may be certified by the ERC (Contestable Customers). SMC Global Power,
through SMEC and its subsidiaries, Bonanza Energy Resources, Inc. (Bonanza Energy),
20

Daguma Agro-Minerals, Inc. (Daguma Agro) and Sultan Energy Phils. Corp. (Sultan
Energy), also owns coal exploration, production and development rights over approximately
17,000 hectares of land in Mindanao which may potentially serve as a source of coal fuel supply
for its planned and contemplated greenfield power projects.
SMC Global Power is a wholly-owned subsidiary of San Miguel Corporation and is the holding
company for the power businesses of San Miguel Corporation. San Miguel Corporation is a
diversified conglomerate founded in 1890 that is listed in the Philippine Stock Exchange, Inc.
(the PSE) and has interests in the food, beverage, packaging, fuel and oil, infrastructure,
banking and property businesses. The relationship of SMC Global Power with San Miguel
Corporation allows it to draw on the extensive business networks, local business knowledge,
relationships and expertise of senior key executive officers of San Miguel Corporation.
STRENGTHS
SMC Global Power believes its competitive strengths are the following:
leading power company in the Philippines with a strong growth platform;
stable and predictable cash flows underpinned by long-term offtake agreements;
flexible and diversified power portfolio;
established relationships with world class partners;
strong parent company support;
experienced management, operating, trading and marketing teams; and
well-positioned to capitalize on the anticipated growth of the Philippine electricity market.
STRATEGIES
The principal business strategies of SMC Global Power are set out below:
optimize the generation capacity of its power portfolio;
grow its power portfolio through the development and acquisition of power generation
capacity;
vertically integrate complementary businesses; and
leverage operational synergies.
CORPORATE INFORMATION
SMC Global Power is incorporated under the laws of the Philippines. The registered office and
principal place of business of SMC Global Power is located at SMC Global Power Holdings
Corp., 155 EDSA, Wack-Wack, Mandaluyong City, Philippines. The telephone number of SMC
Global Power at this location is (632) 702 4500.

21

SUMMARY OF FINANCIAL INFORMATION


The summary of historical consolidated statement of financial position data as of December 31,
2013, December 31, 2014 and December 31, 2015 respectively and the summary of historical
consolidated statement of income and cash flow data for the years ended December 31, 2013,
December 31, 2014 and December 31, 2015, respectively set forth below, have been derived
from, and should be read in conjunction with, the audited consolidated financial statements of
SMC Global Power, including the notes thereto, included elsewhere in this Prospectus. The
consolidated financial statements of SMC Global Power as of and for the years ended
December 31, 2013, 2014 and 2015 respectively, were audited by R.G. Manabat & Co.
Unless otherwise stated, SMC Global Power has presented its consolidated financial results
under PFRS. Potential investors should read the following data together with the more
detailed information contained in Management Discussion and Analysis of Results of
Operations and Financial Condition and the consolidated financial statements and related
notes included elsewhere in this Prospectus. The following data is qualified in its entirety by
reference to all of that information.
CONSOLIDATED STATEMENT OF INCOME
For the years ended December 31
2013
2014
2015
(in millions of )

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

74,043.8

84,293.6

77,506.7

Costs and Expenses


Cost of power sold:
Energy fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Coal, fuel oil and other consumables . . . . . . . . . . . . . . . . . . . . .
Power purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
Plant operations and maintenance fees . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31,269.3
11,179.3
3,929.2
5,382.4
194.4
1,547.8

30,775.9
11,945.3
6,045.5
6,143.9
575.6
2,911.9

23,224.2
10,376.6
8,330.6
6,466.4
502.2
4,904.1

53,502.4
20,541.4
2,587.0

58,398.1
25,895.5
-

53,804.1
23,702.6
-

Gain on sale of investment . . . . . . . . . . . . . . . . . . . . . . . . . . .


Equity in net earnings (losses) of associates and
joint venture - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense and other financing charges . . . . . . . . . . . .
Other income (charges) - net . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) - net . . . . . . . . . . . . . . . . . . . . .
Net Income

795.0

(22.3)

(528.4)

447.8
(12,673.9)
(8,491.1)
3,206.4
(836.3)
4,042.7

550.0
(13,168.5)
68.2
13,322.9
2,693.4
10,629.5

414.4
(13,130.3)
(5,926.1)
4,532.3
2,703.4
1,828.9

Basic/diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . .

3.23

7.73

(0.07)

22

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

2013

As of December 31,
2014
2015
(in millions of )

ASSETS
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade and other receivables - net . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . .
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent Assets
Property, plant and equipment - net . . . . . . . . . . . . . . . . . . . . . .
Investments and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred exploration and development costs . . . . . . . . . . . . . . .
Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent assets - net . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Noncurrent Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . .
Finance lease liabilities - current portion . . . . . . . . . . . . . . . . . . .
Current maturities of long term debt - net of debt issue costs . .
Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent Liabilities
Long-term debt - net of current maturities and debt issue costs
Finance lease liabilities - net of current portion . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent liabilities - net of current portion . . . . . . . . . . .
Total Noncurrent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Undated Subordinated Capital Securities . . . . . . . . . . . . . . . . . .
Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for retirement plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23

29,125.2
31,540.4
1,499.1
7,234.9
69,399.6

38,304.3
18,208.3
1,365.0
9,137.2
67,014.9

22,241.4
18,473.6
1,263.2
15,068.7
57,047.0

217,021.5
6,011.8
526.0
1,728.6
2,909.1
3,506.3
231,703.3
301,103.0

228,133.3
10,612.3
671.8
2,322.2
2,779.4
2,215.4
246,734.4
313,749.3

255,453.0
10,612.9
689.5
2,413.2
2,745.9
2,248.2
274,162.9
331,209.9

22,971.9
15,630.4
142.4
218.5
38,963.3

28,101.1
16,205.2
1,330.0
151.4
45,787.7

32,841.1
16,546.8
15,647.2
99.3
65,134.3

46,946.5
179,372.3
2,088.1
228,406.8
267,370.1

47,383.2
170,098.5
3,043.5
687.2
221,212.4
267,000.1

42,960.6
162,646.4
3,882.9
150.3
209,640.3
274,774.6

1,062.5
2,490.0
785.3
29,395.1
33,732.8

1,062.5
2,490.0
13,110.1
785.3
29,301.3
46,749.2

1,062.5
2,490.0
26,933.6
785.3
(15.6)
25,179.6
56,435.3

301,103.0

313,749.3

331,209.9

CONSOLIDATED STATEMENT OF CASH FLOWS


For the years ended December 31,
2013
2014
2015
(in millions of )

Net cash flows provided by operating activities . . . . . . . . . . . . . .


25,664.0
Net cash flows used in investing activities . . . . . . . . . . . . . . . . . . (20,764.8)
Net cash flows provided by (used in) financing activities . . . . . . .
837.7
Effect of exchange rate changes on cash and cash equivalents
(167.2)
Net increase (decrease) in cash and cash equivalents . . . . . . . .
5,569.7
Cash and cash equivalents at beginning of period . . . . . . . . . . . .
23,555.4
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . .
29,125.2

32,855.8
(6,432.7)
(16,430.3)
(813.6)
9,179.1
29,125.2

25,251.1
(34,751.2)
(6,955.4)
392.5
(16,062.9)
38,304.3

38,304.3

22,241.4

The table below provides selected additional financial and operating data for the periods
indicated.
For the years ended December 31,
2013
2014
2015
(in millions of , unless
indicated otherwise)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EBITDA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electricity sold (GWh) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
of which: bilateral offtake agreements . . . . . . . . . . . . . . . .
of which: WESM sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electricity bought on WESM (GWh) . . . . . . . . . . . . . . . . . . . . . .
Average realized/paid electricity prices (/MWh)
For electricity sold under bilateral offtake agreements . . . .
For electricity sold on WESM . . . . . . . . . . . . . . . . . . . . . . .
For electricity purchased WESM . . . . . . . . . . . . . . . . . . . .
Net debt(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratio of net debt to EBITDA(3) . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,042.7
8,051.9
16,162.7
13,315.5
2,847.3
517.1

10,629.5
10,150.2
17,001.4
14,891.4
2,110.0
476.8

1,828.9
5,458.4
16,557.7
14,713.7
1,844.0
690.4

4,752.0
3,783.0
4,150.0
6,058.3
0.75

5,014.4
4,560.5
4,704.8
(2,419.7)
(0.24)

4,845.1
3,371.5
3,304.4
24,490.6
4.49

(1)

Calculated as (a) net income (excluding items between any or all of the Company and its subsidiaries) plus (b) income tax
expense (benefit), finance cost (less interest income) and depreciation, in each case excluding amounts attributable to ringfenced subsidiaries less (c) foreign exchange gain (loss), gain on sale of investment and aggregate fixed payments made to
Power Sector Assets and Liabilities Management Corporation (PSALM). EBITDA should not be viewed in isolation or as an
alternative to financial measures calculated in accordance with PFRS.

(2)

Net debt represents the sum of long-term debt net of current maturities and debt issue costs and current maturities of longterm debt net of debt issue costs less cash equivalents and excluding PSALM finance lease liabilities, in each case, excluding
amounts attributable to ring-fenced subsidiaries.

(3)

Ratio of Net Debt to EBITDA is computed using net debt and EBITDA, in each case excluding amounts attributable to ringfenced subsidiaries.

24

CALCULATION OF EBITDA

The following table presents a reconciliation of EBITDA to net income for each of the periods
indicated.
For the years ended December 31,
2013
2014
2015
(in millions of )

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add:
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . .
Finance cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
Foreign exchange gains (loss) . . . . . . . . . . . . . . . . . . . . . . .
Aggregate fixed payments made to PSALM(1) . . . . . . . . . . .
Gain on sale of investment . . . . . . . . . . . . . . . . . . . . . . . . .
EBITDA(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,921.6

9,833.1

690.8

(888.1)
12,557.7
(446.9)
5,206.4

2,352.0
12,582.8
(539.0)
5,236.9

2,215.7
12,385.6
(395.9)
5,271.6

(9,434.2)
19,146.0
2,587.0

(808.3)
20,124.0
-

(7,570.9)
22,280.1
-

8,051.9

10,150.2

5,458.4

(1)

Aggregate fixed payments made to PSALM are reflected in the Statement of Cash Flows as Payments of Finance Lease
Liabilities.

(2)

Excludes amounts from ring-fenced subsidiaries. A subsidiary with a project debt was nominated as a ring-fenced subsidiary in
2013. If the amounts from ring-fenced subsidiaries were to be included, the EBITDA would amount to 8.5 billion, 12.8 billion
and 9.1 billion for the years ended December 31, 2013, 2014 and 2015, respectively.

25

SUMMARY OF THE OFFERING


The following summary is qualified in its entirety by, and should be read in conjunction with the
more detailed information appearing elsewhere in this Prospectus.
Issuer

SMC Global Power Holdings Corp.

Instrument

Philippine Peso denominated fixed rate with an aggregate


principal amount of 15,000,000,000, consisting of Series A
Bonds, Series B Bonds and Series C Bonds.
While the Issuer has the discretion to allocate the principal
amount among the Series A Bonds, Series B Bonds and
Series C Bonds based on the bookbuilding process, the
Issuer may opt not to allocate any of the principal amount to
any of these series.

Use of Proceeds
1. Refinance the short term loan provided by BDO of which
the proceeds were used to fully redeem the U.S.$300
million 7.0% Notes due 2016 of the Issuer. The Issuer
shall source the U.S. dollars to pay said short term loan
from internally available funds.
2. Payment of related transaction fees, costs and expenses
3. General corporate purposes (the Company may use a
portion of the proceeds on other purposes such as
operations-related expenses e.g. overhead expenses and
taxes).
The Company will pay BDO in U.S. dollars and shall not
source U.S. dollars from the banking system.
.
100% of face value.

Offer Price
1.
Form and Denomination of
the Bonds

The Bonds shall be issued in scripless form in minimum


denominations of 50,000 each, and in integral multiples of
10,000 thereafter.

Offer Period

The Offer shall commence at 9:00 AM of June 27, 2016 to


12:00 NN of July 1, 2016 or such other date as may be
determined by the Issuer, Joint Issue Managers, Joint Lead
Underwriters and Bookrunners.

Issue Date

July 11, 2016 or such other date as the Issuer, Joint Issue
Managers, Joint Lead Underwriters and Bookrunners may
agree in writing, provided that such date shall be a date
which is within the validity of the SEC Permit to Sell
Securities.

26

Maturity Date

Series A Bonds: July 11, 2021 or five (5) years from Issue
Date
Series B Bonds: July 11, 2023 or seven (7) years from Issue
Date
Series C Bonds: July 11, 2026 or ten (10) years from Issue
Date

Interest Rate

Series A Bonds: Fixed interest rate of 4.3458% p.a.


Series B Bonds: Fixed interest rate of 4.7575% p.a.
Series C Bonds: Fixed interest rate of 5.1792% p.a.

Interest Payment

Interest on the Bonds shall be calculated on a 30/360-day


count basis and shall be paid quarterly in arrears starting on
October 11, 2016 for the first Interest Payment Date, and
January 11, April 11, July 11 and October 11 of each year
thereafter, for as long as the Bonds remain outstanding.

Early Redemption Option

The Issuer shall have the right, but not the obligation, to
redeem in whole (and not in part), any series of the
outstanding Bonds on the relevant dates as set forth below.
The amount payable to the Bondholders upon the exercise of
the Early Redemption Option by the Issuer shall be
calculated, based on the principal amount of Bonds being
redeemed, as the sum of:
(i)

accrued interest computed from the last Interest


Payment Date up to and including the relevant Early
Redemption Option Date; and

(ii) the product of the principal amount of the Bonds being


redeemed and the Early Redemption Price in
accordance with the following schedule:
Early Redemption Option Date on
Series A Bonds

Early Redemption
Price

Third (3rd) anniversary from Issue


Date

101.0%

Fourth (4th) anniversary from Issue


Date

100.5%

Early Redemption Option Date on


Series B Bonds

Early Redemption
Price

Fifth (5th) anniversary from Issue Date

101.0%

Sixth (6th) anniversary from Issue Date

100.5%

27

Early Redemption Option Date on


Series C Bonds

Early Redemption
Price

Seventh anniversary (7th) from Issue


Date

102.0%

Eight (8th) anniversary from Issue Date

101.0%

Ninth (9th) anniversary from Issue Date

100.5%

The Issuer shall give not more than sixty (60) days nor less
than thirty (30) days prior written notice of its intention to
redeem the Bonds, which notice shall be irrevocable and
binding upon the Issuer to effect such early redemption of the
Bonds on the Early Redemption Date stated in such notice.
Redemption Due to
Taxation

If payments under the Bonds become subject to additional or


increased taxes other than the taxes and rates of such taxes
prevailing on the Issue Date as a result of certain changes in
law, rule or regulation, or in the interpretation thereof, and
such additional or increased rate of such tax cannot be
avoided by use of reasonable measures available to the
Issuer, the Issuer may redeem the Bonds in whole, but not in
part, on any Interest Payment Date (having given not more
than sixty (60) days nor less than thirty (30) days prior written
notice) at par, plus accrued interest.

Final Redemption

The Bonds shall be redeemed at par or 100% of face value


on their respective Maturity Dates, unless earlier redeemed
by the Company.

Status of the Bonds

The Bonds shall constitute the direct, unconditional,


unsubordinated and unsecured obligations of SMC Global
Power and shall at all times rank pari passu and ratably
without any preference or priority amongst themselves and
at least pari passu with all other present and future
unsubordinated and unsecured obligations of SMC Global
Power, other than obligations preferred by law.

Negative Pledge

The Bonds will have the benefit of a negative pledge on all


existing and future assets of the Issuer, subject to the
exceptions as described in page 61 of the Prospectus.

Listing

The Issuer intends to list the Bonds in the PDEx on Issue


Date.

Governing Law

Philippines

28

Joint Issue Managers,


Joint Lead Underwriters and
Bookrunners

BDO Capital & Investment Corporation


BPI Capital Corporation
China Bank Capital Corporation
Maybank ATR Kim Eng Capital Partners, Inc.
PNB Capital and Investment Corporation
RCBC Capital Corporation
SB Capital Investment Corporation
Standard Chartered Bank
United Coconut Planters Bank

Registry and Paying Agent

Philippine Depository & Trust Corp.

Trustee

Philippine National Bank Trust Banking Group

29

RISK FACTORS AND OTHER CONSIDERATIONS


An investment in the Bonds involves a number of risks. The price of securities can and does
fluctuate, and any individual security may experience upward or downward movements and may
even become valueless. There is an inherent risk that losses may be incurred rather than profit
made as a result of buying and selling securities. Past performance is not a guide to future
performance. There may be a large difference between the buying price and the selling price of
these securities. Investors deal with a range of investments, each of which may carry a different
level of risk. This section entitled Risk Factors and Other Considerations does not purport to
disclose all of the risks and other significant aspects of investing in these securities. Investors
should undertake independent research and study the trading of securities before commencing
any trading activity. Investors may request publicly available information on the Bonds and the
Company from the SEC. Each Investor should seek professional advice if he or she is uncertain
of, or has not understood any aspect of, the securities to be invested in or the nature of risks
involved in the trading of securities.
Prospective investors should carefully consider the risks described below, in addition to the other
information contained in this Prospectus, including the audited financial statements of SMC
Global Power and notes relating thereto included in this Prospectus, before making any
investment decision relating to the Bonds. The occurrence of any of the events discussed below
and any additional risks and uncertainties not currently known to SMC Global Power or that
are currently considered immaterial could have a material adverse effect on the business,
results of operations, financial condition and prospects of SMC Global Power and prospective
investors may lose all or part of their investment.
The means by which the Company plans to address the risks discussed herein are principally
presented in the sections of this Prospectus entitled Description of Business - Strengths of the
Company, Description of Business - Business Strategies and Management Discussion and
Analysis of Results of Operations and Financial Condition.
RISKS RELATING TO SMC GLOBAL POWER
Increased competition in the Philippine power industry.
The Government has sought to implement measures designed to enhance the competitive
landscape of the power market, particularly for the unregulated sectors of the industry. These
measures include the privatization of NPC owned and controlled power generation assets, the
establishment of the WESM, the start of the Retail Competition and Open Access (RCOA),
and implementation of mandatory Competitive Selection Process (CSP) for Distribution Utilities.
Further, Republic Act No. 10667 or the Philippine Competition Act was enacted to enhance
economic efficiency and promote free and fair competition in trade, industry and all commercial
economic activities, prevent economic concentration which will manipulate or constrict the
discipline of free markets, and penalize all forms of anti-competitive agreements, abuse of
dominant position and anti-competitive mergers and acquisitions, with the objective of
protecting consumer welfare and advancing domestic and international trade and economic
development.
The move towards a more competitive environment could result in the emergence of new and
numerous competitors. These competitors may have greater financial resources, and may have
more extensive experience than SMC Global Power, giving them the ability to respond to
operational, technological, financial and other challenges more quickly than SMC Global
Power. These competitors may therefore be more successful than SMC Global Power in
acquiring existing power generation facilities or in obtaining financing for and the
construction of new power generation facilities. The type of fuel that competitors use for
their generation facilities may also allow them to produce electricity at a lower cost and to sell
electricity at a lower price. SMC Global Power may therefore be unable to meet the competitive
challenges it will face.
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As a result of increased competition, SMC Global Power could also come under pressure to
review or renegotiate the terms of existing offtake agreements with customers, which may lead
to a downward adjustment of tariffs, and the business, financial performance and results of
operations of SMC Global Power could be adversely affected. To the extent that distribution
utilities or industrial offtakers agree to purchase from other generation companies instead of
purchasing from SMC Global Power, the ability of SMC Global Power to increase its sales and
sell additional electricity to distribution utilities or industrial offtakers through its generation
facilities would be adversely affected.
The Company, through its subsidiaries, has a diversified portfolio which allows it to be more
competitive with its supply offers. It is also managed by an experienced management team
composed of experts with extensive knowledge of the Philippine power industry. Coupled with
the strong shareholder support from SMC, this will enable SMC Global Power to sustain its
position as one of the major players in the industry. Moreover, SMC Global Power also continues
to cultivate its good working relationship with its offtakers which ensures continuity of its
customer base.
Disruptions in fuel supply.
The operations of the Sual Power Plant, Limay Cogeneration Plant, and Ilijan Power Plant
depend on the availability of fuel, in particular coal and natural gas. SMC Global Power, through
its subsidiaries, is responsible, at the cost of the latter, for supplying the fuel requirement of the
Sual Power Plant and Limay Cogeneration Plant. SMC Global Power, through its subsidiaries,
has entered into fuel supply agreements for its power plants. For example, SCPC has existing
coal supply agreements with internationally recognized coal suppliers, such as PT Bayan
Resources TBK (Bayan) and PT Kaltim Prima Coal (KPC).
There is no assurance that there will not be any interruption or disruption in, or change in terms
of, the fuel supplies to these power plants, or that there will be sufficient fuel in the open market
or sufficient transportation capacity available to ensure that these power plants receive
sufficient fuel supplies required for their operations on a timely basis or at all. There is also no
assurance that SMC Global Power, through its subsidiaries, will be able to purchase all of its
required fuel supplies from its regular suppliers that produce fuel of acceptable and known
quality. Consequently, SMC Global Power could experience difficulties ensuring a consistent
quality of fuel, which could negatively affect the stability and performance of these power plants.
Such factors, which may include events which are beyond the control of SMC Global Power,
could affect the normal operation of these power plants which could have material adverse
effect on the business, financial condition and results of operations of SMC Global Power.
SMC Global Power, through its subsidiaries, has fuel supply agreements with recognized,
reputable, and reliable domestic and international coal suppliers, such as but not limited to PT
Bukit Asam (Persero) TBK, Glencore International AG, PT Trubaindo Coal Mining, Noble
Resources International Pte Ltd., Vitol Asia Pte. Ltd., PT Kaltim Prima Coal, Avra Commodities
Pte. Ltd., for its power plants. The diversity of coal suppliers of the Company provides
assurance of fuel supply limiting any issues with any specific region or supplier. For Natural
Gas, NPC/PSALM is contractually obligated to deliver supply of fuel to the Ilijan plant under the
IPPA Agreement. The Company has no direct relationship with the supplier of natural gas.
However, events of shutdown or gas restrictions can be interpreted as force majeure or may be
covered by the outage provisions of the downstream Power Supply Agreements (PSAs) of
SPPC, limiting any adverse effects to the Company of disruptions in the supply of natural gas.
Reliance on Independent Power Producers for the operation and maintenance of the
IPPA Power Plants.
Power generation involves the use of highly complex machinery and processes and the
success of SMC Global Power depends on the effective maintenance of equipment for its
power generation assets. IPPs associated with the respective IPPA Power Plants are
responsible for the operation and maintenance of the IPPA Power Plants.
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Although the energy conversion agreements (ECAs) with the IPPs or power purchase
agreements (PPAs) with NPC in respect of the IPPA Power Plants contain bonus and penalty
provisions, these do not eliminate the risk of failure on the part of the IPPs to satisfactorily
perform their respective operations and maintenance obligations. Any failure on the part of such
IPPs to properly operate and/or adequately maintain their respective power plants could have a
material adverse effect on the business, financial condition and results of operations of SMC
Global Power.
In addition, if SMC Global Power, through its subsidiaries, fails to generate or deliver electricity
beyond contractually agreed periods due to the failure of the IPPs to operate and maintain the
power facilities, the counterparties of SMC Global Power in its power supply contracts (PSCs)
and RSCs may have a right to terminate those contracts for outages beyond applicable outage
allowances in the PSCs, and replacement contracts may not be entered into on comparable
terms or at all. Any of the foregoing could have a material adverse effect on the financial and
operating performance of SMC Global Power.
SMC Global Power leverages on the strengths and track record of its world-class IPP partners
in operating its existing power portfolio by monitoring their adherence to the minimum operating
protocols specified in the IPPA and ECAs in line with international best practices.
Market limitations under the Electric Power Industry Reform Act of 2001 (EPIRA).
As of December 31, 2015, SMC Global Power, through its IPPA and IPP subsidiaries, had a
22% market share of the Luzon grid and a 17% market share of the national grid in terms of
installed capacity based on industry data from the ERC. The EPIRA limits the market share of a
participant to 30% per grid and 25% of the national grid by installed capacity. SMC Global
Power may not receive permission to increase its capacity and market share if this would result
in exceeding the permitted capacity or market share prescribed by the EPIRA. Such inability to
expand and grow the power business could materially and adversely affect the business
prospects of SMC Global Power.
SMC Global Power seeks to capitalize on regulatory and infrastructure developments by
scheduling the construction of greenfield power projects to coincide with the growth of the
Philippine power industry. Pursuant to the EPIRA limits, SMC Global Power may still expand by
as much as 1,493 MW nationwide, but limited to the following capacities per grid: 1,014 MW in
Luzon, 709 MW in Visayas and 649 MW in Mindanao. At the current levels, SMC Global Power
is within the market share cap even with the addition of the greenfield power projects of the
Company under construction today.
Development of greenfield power projects.
The development of greenfield power projects involves substantial risks that could give rise to
delays, cost overruns, unsatisfactory construction or development or the total or partial loss of
the interest of SMC Global Power in the projects. Such risks include the inability to secure
adequate financing, inability to negotiate acceptable offtake agreements, and unforeseen
engineering and environmental problems, among others. Any such delays, cost overruns,
unsatisfactory construction or development, or the total or partial loss of the interests in its
projects could have a material adverse effect on the business, financial condition, results of
operation and future growth prospects of SMC Global Power.
Under the Engineering, Procurement and Construction (EPC) contracts, the Company will be
indemnified in the event of delay and/or default of the EPC Contractor. To ensure timely delivery
and performance, the EPC Contracts provide for a schedule of payments of the contract price
based on agreed milestones. SMC Global Power checks on the accomplishments of the EPC
Contractor prior to the release of the corresponding payment per milestone.

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Adverse effect of WESM price fluctuations.


From the time the WESM for Luzon began operating in June 2006, market prices for electric
power have fluctuated substantially. Unlike many other commodities, electric power can only
be stored on a very limited basis and generally must be produced concurrently with its use.
As a result, power prices are subject to significant volatility from supply and demand
imbalances. Long-term and short-term power prices may also fluctuate substantially due to
other factors outside of the control of SMC Global Power, including:

increases and decreases in generation capacity in the markets of SMC Global Power,
including the addition of new supplies of power from existing competitors or new market
entrants as a result of the development of new generation power plants, expansion of
existing power plants or additional transmission capacity;

changes in power transmission or fuel transportation capacity constraints or inefficiencies;

electric supply disruptions, including power plant outages and transmission disruptions;

changes in the demand for power or in patterns of power usage, including the potential
development of demand-side management tools and practices;

the authority of the ERC to review and, if warranted under applicable circumstances, adjust
the prices on the WESM;

climate, weather conditions, natural disasters, wars, embargoes, terrorist attacks and
other catastrophic events;

availability of competitively priced alternative power sources;

development of new fuels and new technologies for the production of power; and

changes in the power market and environmental regulations and legislation.

On March 3, 2014, the ERC issued an order declaring the prices in the WESM for the
November and December 2013 billing months as null and void (the ERC Order). SMC Global
Power filed a motion for reconsideration of the ERC Order, the resolution of which is currently
pending. See Certain Legal Proceedings of this Prospectus.
These factors could have a material adverse effect on the business, financial condition and
results of operations of SMC Global Power.
The strategy of the Company is to source majority of its revenues from bilateral offtake
agreements. This ensures cash flows while minimizing the exposure of the Company to any
unfavorable fluctuations in WESM prices. Revenue from bilateral contracts with offtakers
contributed 85%, 89% and 92% of total revenue for the years ended December 31, 2013, 2014
and 2015, respectively.
Non-renewal of or non-compliance with offtake agreements.
SMC Global Power, through its subsidiaries, has offtake agreements with various distribution
utilities, electric cooperatives and large industrial and commercial users. Some offtake
agreements will expire before the termination of the applicable IPPA Agreement, although they
may be renewed by mutual agreement of the parties. The IPPA Agreements provide that the
amounts of payment obligations of SMC Global Power will increase over time. While SMC
Global Power intends to renew the offtake agreements upon expiration to provide stable and
predictable revenue streams to meet its obligations under the IPPA Agreements, there is no
assurance that SMC Global Power will be able to renew or enter into new offtake agreements
for similar volumes or at similar prices, or that SMC Global Power will be able to enter into new
33

offtake agreements or at all. If SMC Global Power is unable to enter into new offtake
agreements, SMC Global Power will be further exposed to fluctuations in electricity prices in the
WESM, which could materially and adversely affect the profitability of SMC Global Power. In
particular, sales to Meralco in 2015 under the respective PSAs in relation to the Ilijan and Sual
Power Plants comprised approximately 59% of the revenue of SMC Global Power from sales
of power from the IPPA Power Plants. The Ilijan Power Plant PSA will expire in 2019 and can
be extended up to the end of the IPPA period in 2022 while the Sual Power Plant PSA will
expire in 2019 and can be extended up to the end of the IPPA period in 2024, in each case
upon mutual agreement of the parties. When the current offtake agreements with Meralco
expire or are otherwise renegotiated, they may be renewed for lower electricity volumes than in
the past or on different terms, including under different pricing terms. Meralco is preparing to
enter the power generation business and is expected to become a direct competitor of SMC
Global Power.
In addition, there can be no assurance that Meralco and other offtakers will be able to meet
their future payment obligations under their agreements with the subsidiaries of SMC Global
Power.
The business, cash flows, earnings, results of operations and financial condition of SMC Global
Power could be materially and adversely affected if Meralco does not renew its offtake
agreements with SMC Global Power under favorable terms or at all or if Meralco and other
offtakers are unable to meet their payment obligations under existing agreements, and SMC
Global Power is unable to find new customers to replace Meralco and other offtakers.
The Company manages a large, reliable and diverse portfolio of power plants that allows it to
supply at competitive rates and terms. Considering the increasing electricity requirements of the
country underpinned by a strong GDP and population growth rate, the Company believes that
its offtake agreements will be renewed. Further, the Company has an experienced sales and
marketing team that actively markets to its existing and to new financially capable prospective
customers. In addition, the Company maintains good working relationships with its offtakers and
has cultivated a long history of reliability and good customer service.
Standard terms of the PSAs require offtakers to post a security deposit equivalent to 100% of
estimated monthly power bill, which will cover the customers liability in the event of noncompliance with payment.
Operating capacities of its power portfolio.
The administration of the output of the power generation plants involves significant risks,
including:

breakdown or failure of power generation equipment, transmission lines, pipelines or


other equipment or processes, leading to unplanned outages and operational issues;

flaws in the equipment design or in power plant construction;

issues with the quality or interruptions in the supply of key inputs, including fuel or water;

material changes in legal, regulatory or licensing requirements;

operator error;

performance below expected levels of output or efficiency;

industrial actions affecting power generation assets owned or managed by the


subsidiaries of SMC Global Power or its contractual counterparties;

pollution or environmental contamination affecting the operation of power generation


assets;
34

planned and unplanned power outages due to maintenance, expansion and refurbishment;

inability to obtain or the cancellation of required regulatory, permits and approvals;

opposition from local communities and special interest groups; and

force majeure and catastrophic events including fires, explosions, earthquakes, volcanic
eruptions, floods and terrorist acts that could cause forced outages, suspension of
operations, loss of life, severe damage and plant destruction.

There is no assurance that any event similar or dissimilar to those listed above will not
occur or will not significantly increase costs or decrease or eliminate sales derived by
SMC Global Power from its power generation assets. While the IPPA Agreements of the
Company provide certain reliefs in the event the IPPA Power Plants cannot produce or
dispatch electricity, if any of the power generation assets of the Company is unable to generate
or deliver electricity to customers for an extended period of time which may be due to the
aforementioned risks, its customers may be exempt from making certain payments so long
as any such events continue. In addition, if the subsidiaries of SMC Global Power fails to
generate or deliver electricity beyond the contractually agreed outage periods, its counterparts
in its power supply contracts may have a right to terminate those contracts, and replacement
contracts may not be entered into on comparable terms or at all. Any of the foregoing could
have a material adverse effect on the financial and operating performance of SMC Global
Power.
SMC Global Power leverages on the strengths and track record of its partners in operating its
existing power portfolio by monitoring their adherence to the minimum operating protocols
specified in their respective IPPA Agreements or operations and maintenance agreements in
line with international best practices.
Insurance coverage for IPPA Plants.
The IPPs of the IPPA Power Plants are responsible for maintaining insurance for all of the
facilities, equipment and infrastructure for those power plants, with the exception of the dam
and spillway of the San Roque Power Plant, for which NPC is obligated to maintain insurance
coverage. SMC Global Power is not, however, a beneficiary of any of these insurance
policies. SMC Global Power has no business interruption insurance coverage and is therefore
uninsured for liabilities or any direct or indirect costs and losses which may be incurred, as a
result of any business interruption that the Company may experience. SMC Global Power
believes that there is no business interruption insurance available for the IPPA business
model under which the Company is currently operating. Accordingly, any uninsured liabilities or
direct or indirect losses, including any third party claims, that result from an interruption to the
business of SMC Global Power could have a material adverse effect on its financial condition
and results of operations.
While the Company has not experienced any major downturn in the operations of the IPPA
Power Plants brought about by unexpected losses caused by natural disasters or other events
that could affect its facilities, the Company believes that it can withstand such events with its
business strategies in place. SMC Global Power also has a system of financial prudence and
corporate governance that provides the foundation for its risk management initiatives. For
further discussion on the business strategy of the Company, please refer to page 84.
Insurance coverage for generation plants.
The power generation plants owned by the subsidiaries of SMC Global Power may not be fully
insured against, and insurance may not be available for, unexpected losses caused by natural
disasters, breakdowns or other events that could affect the facilities and processes used by its
businesses.
35

Any unexpected losses caused by such events against which it is not fully insured could have a
material adverse effect on its businesses, financial condition and results of operations.
Any accident at the facilities of the SMC Global Power could result in significant losses.
SMC Global Power could suffer a decline in production, receive adverse publicity and be forced
to invest significant resources in addressing such losses. Such events could materially and
adversely affect the financial condition and results of operations of SMC Global Power.
The Company has secured the necessary insurances for the power plants that it owns to cover
all insurable risks.
No direct contractual and operational relationship.
SMC Global Power is dependent on the IPPA Power Plants to generate power, and for the IPPs
to comply with their contractual obligations to NPC under their IPP Agreements. SMC Global
Power does not have a direct contractual relationship with the IPPs and cannot directly enforce
the IPP Agreements against the IPPs. Failure by an IPP to comply with its obligations under its
IPP Agreement may significantly reduce or eliminate power generation volumes or increase
costs, thereby decreasing or eliminating revenues that the IPPA subsidiaries of SMC Global
Power can derive from selling the power generated by the IPPA Power Plants. Any claims for
damages for breach, or other entitlement, benefit or relief under the IPPA Agreement arising
from the breach, by the IPP, of its IPP Agreement obligations must be claimed by SMC Global
Power against PSALM through specified claim mechanisms. The IPPA Agreements do not
permit set-off of claims, and the IPPA subsidiaries of SMC Global Power are only entitled to
payment of their claim after PSALM has received payment from the IPP of its corresponding
claim. Accordingly, the IPPA subsidiaries of SMC Global Power bear the risks associated with
the lack of direct recourse against the IPPs, delays in the enforcement of their claims and other
risks related to pursuing claims or legal proceedings against a state-owned entity such as
PSALM. Any of these factors could have a material adverse effect on the business, financial
condition and results of operations of SMC Global Power.
Foreign exchange risk.
While most of the offtake agreements of the subsidiaries of SMC Global Power allow
adjustments for foreign exchange rate fluctuations, SMC Global Power remains subject to
foreign exchange risk. A substantial amount of consolidated revenue from sales of power by
SMC Global Power is denominated in Pesos, while a portion of its expenses and obligations
are denominated in U.S. dollars. The scheduled payment obligations to PSALM pursuant to
the IPPA Agreements of the Company with PSALM are denominated in both U.S. dollars and
Pesos. The proportion of U.S. dollars to Pesos payable under the IPPA Agreements was
approximately 50% at the exchange rates prevailing as of the dates of the respective IPPA
Agreements. The relevant subsidiaries of SMC Global Power also purchases coal as fuel for
the Sual Power Plant and its greenfield power projects using U.S. dollars. In addition, a
significant portion of the capital expenditures required for its greenfield power projects are
denominated in U.S. dollars.
SMC Global Power issued bonds with an aggregate principal amount of U.S.$300 million in
January 2011 which was redeemed in January 2016. A U.S.$300 million short term loan was
drawn with BDO to fund the redemption of said bonds. The Company has also fully drawn its
U.S.$700 million loan facility as of March 2015. Moreover, in May 2014 and August 2015, SMC
Global Power issued U.S.$300 million of undated subordinated capital securities and U.S.$300
million of undated subordinated capital securities, respectively. A depreciation of the Peso,
particularly with respect to the U.S. dollar, increases the Peso equivalent value of the foreign
currency-denominated costs and obligations of SMC Global Power. This could adversely affect
the results of operations of SMC Global Power and its ability to service its foreign currencydenominated liabilities.
36

There can be no assurance that the Peso will not depreciate significantly against the U.S.
dollar or other currencies in the future or that such depreciation will not have an adverse effect
on the growth of the Philippine economy or the financial condition of SMC Global Power.
SMC Global Power actively evaluates combination of natural hedges such as holding U.S.
dollar-denominated assets and liabilities, foreign exchange adjustments in the tariffs, and
derivative instruments to manage its exchange rate risk exposure. The Company also considers
redenomination of U.S. dollar-denominated obligation to Philippine Peso-denominated
obligation to minimize exposure to foreign exchange fluctuations.
Variations in hydrological conditions and irrigation requirements.
The hydro-electric generation is dependent on the amount and location of rainfall and river
flows, which vary widely from quarter to quarter and from year to year. NPC owns and
operates the dam and the dam-related facilities of the San Roque Power Plant and has
obtained a water permit allowing it to use the water flow from the Agno River to generate
power from the San Roque Power Plant with an allowable volume dictated by downstream
irrigation requirements set by the National Irrigation Administration (NIA).
The facilities of AHEPP are located within the Angat Watershed Reservation, which is managed
by and is under the jurisdiction of NPC. NPC was issued a water permit dated November 28,
1979 by then National Water Resources Council pursuant to which NPC has authority to extract
water from the Angat River for power generation purposes. In a resolution dated April 4, 2016,
NWRB granted KWPP Holdings Corporation's petition for the transfer the said water permit to
itself and authorized its lease to AHC. The water discharged by the AHEPP is used for the
following two purposes: (i) the water outflow of the three Auxiliary Units of 6 MW capacity each
(each an Auxiliary Unit or collectively, Auxiliary Units) flows to the Ipo Dam and is conveyed
by Metropolitan Waterworks and Sewerage System (MWSS) to Metro Manila for domestic use;
and (ii) the water outflow of the four Main Units of 50 MW capacity each (each a Main Unit or
collectively, Main Units) flows to the Bustos Dam and is conveyed by NIA to the province of
Bulacan for irrigation purposes.
The levels of hydro-electric production can therefore vary from period to period depending on
the water levels in the reservoir and downstream irrigation and water supply requirements. In
years of less favorable hydrological conditions, such as periods of drought or when the El Nio
weather phenomenon occurs, the reservoir has low water levels, which reduce the amount of
power that the San Roque Power Plant and the AHEPP are able to generate. This could
reduce the revenues from the sale of power from the San Roque Power Plant and the
AHEPP, which could have a material adverse effect on SMC Global Powers business, financial
condition and results of operations. Conversely, if too much rainfall occurs at any one time,
such as during a typhoon, water may flow too quickly and at volumes in excess of the water
intake capacity of the San Roque Power Plant and AHEPP, which may cause release of water
using the spillway.
The Company, through its subsidiaries, actively manages the water supply of the hydro power
plants to optimize generation while ensuring that the irrigation supply requirements are met in
coordination with the relevant government agencies.
Challenges in successfully implementing its growth strategy.
Implementing the growth strategy of SMC Global Power involves: (i) substantial investments in
new power generation facilities; (ii) acquisitions of existing power generation capacity; and (iii)
entering into alliances with strategic partners. The success in implementing the strategy of the
Company will depend on, among other things, its ability to identify and assess investment and
acquisition opportunities as well as potential partners, its ability to successfully finance, close
and integrate investments, acquisitions and relevant technologies for the production of power,
its ability to manage construction of planned greenfield power projects within technical, cost
and timing specifications, its ability to control costs and maintain sufficient operational, financial
and internal controls, the strength of the Philippine economy (including overall growth and
37

income levels) and the overall levels of business activity in the Philippines.
SMC Global Power is also contemplating several additional potential investments and
acquisitions, but has not entered into any definitive commitment or agreement for any such
contemplated investment or acquisition. If general economic and regulatory conditions or
market and competitive conditions change, or if operations do not generate sufficient funds or
other unexpected events occur, SMC Global Power may decide to delay, modify or forego some
of its planned or contemplated projects or alter aspects of its growth strategy, and its future
growth prospects could be materially and adversely affected.
The growth strategy of SMC Global Power will also place significant demands on its
management, financial and other resources. In particular, continued expansion will increase the
challenges for financial and technical management, recruitment, training and retention of
sufficient skilled technical and management personnel and developing and improving its
internal administrative infrastructure. Any inability to meet these challenges could disrupt the
business of SMC Global Power, reduce its profitability and adversely affect its results of
operations and financial condition.
The Company: (i) maintains a highly experienced management team composed of experts with
extensive knowledge of the Philippine power industry; (ii) has in place a system of financial
prudence and corporate governance; and (iii) strengthens the competencies of its employees
specifically those in the succession pipeline of key personnel, provides training to prepare
employees to take on higher responsibilities, and pursues strategic hiring for identified critical
positions.
The Company undertakes prudent review and due diligence, and evaluates the viability of any
acquisition or investment. In addition, the Company is guided by metrics when assessing
possible investments, which include, but are not limited to, financial returns and possible
synergies, with an overall objective of maximizing returns.
Availability of financing.
SMC Global Power expects to fund its expansion and growth plans through a combination of
internally generated funds and external financing. The continued access to debt and equity
financing of the Company is subject to factors, many of which are outside of the control of SMC
Global Power: political instability, economic downturn, social unrest, or changes in the
Philippine regulatory environment could increase the cost of borrowing, decrease the price of its
securities, or restrict the ability of SMC Global Power to obtain debt or equity financing. In
addition, recent disruptions in global capital and credit markets may continue indefinitely or
intensify. Other factors affecting the ability of SMC Global Power to borrow include (i) Philippine
regulations limiting bank exposure (including single borrower limits) to a single borrower or
related group of borrowers, (ii) compliance by the Company with existing debt covenants,
which include leverage ratio covenants, and (iii) the ability of SMC Global Power to service
new debt. The inability of SMC Global Power to obtain financing from banks and other financial
institutions or from capital markets would adversely affect its ability to execute its expansion
and growth strategies and have a material adverse effect on the business, financial condition,
and results of operations of SMC Global Power.
The Company employs a system of financial prudence and good corporate governance to
manage the risks relating to debt and equity financing. The Company can also rely on its
strengths to navigate and have continual access to financing. For further discussions on these
strengths, please refer to Strengths of SMC Global Power on page 81.
Significant finance lease obligations.
The IPPA subsidiaries of SMC Global Power has significant finance lease obligations.
Each of the IPPA Agreements requires the IPPA subsidiaries of SMC Global Power to make
monthly payments consisting of two separate components: a fixed payment, the amount of
38

which in any given month is specified by the IPPA Agreement itself, and a variable payment,
the amount of which in any given month depends on the amount of power delivered by the
IPPA Power Plant, subject to certain adjustments. Through the IPPA Agreements, the IPPA
subsidiaries of SMC Global Power has acquired substantially all of the risks (except for the
operations and maintenance) and rewards incidental to ownership of the IPP Power Plants,
therefore the IPPA subsidiaries of SMC Global Power accounts for the IPPA Agreements as
finance leases. Accordingly, upon entry into each IPPA Agreement, the IPPA subsidiaries of
SMC Global Power recognized the related power plant as an asset in its balance sheet under
property, plant and equipment based on the present value of the fixed monthly payments due
to PSALM under the IPPA Agreement and recognized a corresponding liability in its balance
sheet under finance lease liabilities.
Each of the fixed monthly payments made by SMC Global Power, through its IPPA subsidiaries,
under an IPPA Agreement is apportioned between finance cost and reduction of (or, in certain
cases, addition to) the finance lease liability so as to achieve a constant rate of interest on
the remaining balance of the liability. The finance costs are shown in the consolidated
income statements of SMC Global Power as finance cost and recognized as part of Other
income (charges) while the reduction of the finance lease liability (or addition to finance lease
liability as applicable) is recorded directly in the consolidated balance sheet of SMC Global
Power. Each of the variable payments made by the IPPA subsidiaries of SMC Global Power
under an IPPA agreement is recorded in the consolidated income statement of SMC
Global Power as energy fees that form one component of cost of power sold.
The level of finance lease obligations of the IPPA subsidiaries of SMC Global Power could:

require SMC Global Power, through its IPPA subsidiaries, to dedicate a substantial portion
of its cash flow from operations to debt and other payment obligations, thereby decreasing
the availability of its cash flow for business operations, including expansion and acquisitions;

increase the vulnerability of the IPPA subsidiaries of SMC Global Power to general
adverse economic and industry conditions; and

prevent the IPPA subsidiaries of SMC Global Power from accessing credit or equity
markets to satisfy its repayment obligations as they become due on favorable terms, or at
all.

Majority of the capacity of the IPPA Power Plants is contracted with MERALCO, which ensures
cash flows to pay for its finance lease liabilities under the IPPAs. MERALCO contracts will expire
in 2019 with option to renew until the end of the IPPA Agreement. Considering the increasing
electricity requirements of the country underpinned by a strong GDP and population growth rate,
the Company believes that its offtake agreements will be renewed. The renewal of these PSCs
will ensure cash flows and allow the Company to meet the obligations under its finance lease
liability. In addition, the Company maintains good working relationships with its offtakers and has
cultivated a long history of reliability and dependability. Finally, the Company has an experienced
sales and marketing team that actively markets to its existing customers and to other financially
capable prospective customers.
Dependence on the existence of transmission infrastructure.
The transmission infrastructure in the Philippines continues to experience constraints on the
amount of electricity that can be delivered from power plants to customers, as well as limited
interconnectivity between the Luzon-Visayas grid and the lack of any interconnectivity between
the Luzon-Visayas grid and the Mindanao grid.
If these transmission constraints continue, the ability of SMC Global Power to supply
electricity from the IPPA Power Plants of its subsidiaries and its planned and contemplated
greenfield power projects, as well as the ability of SMC Global Power to increase its
geographical reach, will be adversely affected. This could have a material adverse effect on the
business and revenue growth of the Company from power sales.
39

The Company and its subsidiaries are in constant consultation and communication with NGCP
and other relevant government institutions to address the transmission infrastructure
requirements of the Company and its subsidiaries. The DOE is mandated by law to prepare a
Transmission Development Plan to be implemented by NGCP which aims to address projected
infrastructure limitations and interconnectivity of sub-grids.
Certain tax exemptions and tax incentives.
As of December 31, 2015, certain subsidiaries of SMC Global Power that were registered with
the Board of Investments as new operators with pioneer status, namely, SMC Consolidated
Power Corporation for the Limay Greenfield Power Plant and San Miguel Consolidated Power
Corporation for the Davao Greenfield Power Plant, benefit from certain tax exemptions and tax
incentives, deductions from taxable income subject to certain capital requirements and dutyfree importation of capital equipment, spare parts and accessories.
In the event of expiration, revocation or repeal of these tax exemptions or tax incentives, the
income from these sources will be subject to the corporate income tax rate, which is 30.0% of
net taxable income as of December 31, 2015. As a result, the consolidated tax expense of SMC
Global Power would increase and its profitability would decrease. The expiration, non-renewal,
revocation or repeal of these tax exemptions and tax incentives, and any associated impact on
SMC Global Power, could have a material adverse effect on the business, financial condition
and results of operations of SMC Global Power.
Government Regulation.
The business of SMC Global Power is subject to extensive government regulation, particularly
for its Limay Cogeneration Plant and its greenfield power plants. To conduct its business, SMC
Global Power and its subsidiaries must obtain various licenses, permits and approvals. Even
when SMC Global Power and its subsidiaries obtain the required licenses, permits and
approvals, their operations are subject to continued review under the applicable regulations,
and the interpretation or implementation of such regulations is subject to change.
For example, the operations of the Limay Cogeneration Plant and its greenfield power plants
are subject to a number of national and local laws and regulations, including safety, health and
environmental laws and regulations. These laws and regulations impose controls on air and
water discharges, on the storage, handling, discharge and disposal of waste, location of
facilities, employee exposure to hazardous substances, site clean-up, groundwater quality and
availability, plant and wildlife protection, and other aspects of the operations of the business of
SMC Global Power and its subsidiaries. Failure to comply with relevant laws and regulations
may result in monetary penalties or administrative or legal proceedings against SMC Global
Power or its subsidiaries, which may cause or result in the termination or suspension of its
licenses or the operation of its facilities.
In addition, SMC Global Power implements, through SMEC, its plans to develop its coal
mining assets and it will be subject to national and local laws and regulations affecting coal
mining.
SMC Global Power and its subsidiaries have incurred, and expect to continue to incur,
operating costs to comply with such laws and regulations. In addition, SMC Global Power and
its subsidiaries have made, and expect to continue to make, capital expenditures on an
ongoing basis to comply with safety, health, mining and environmental laws and regulations.
While the Company believes that it has, at all relevant times, materially complied with all
applicable laws, rules and regulations, there can be no assurance that SMC Global Power and
its subsidiaries will be able to remain in compliance with applicable laws and regulations or will
not become involved in future litigation or other proceedings or be held liable in any future
litigation or proceedings relating to safety, health, mining and environmental matters, the costs
of which could be material. In addition, safety, health, mining and environmental laws and
40

regulations in the Philippines have become increasingly stringent. There can be no assurance
that the adoption of new safety, health, mining and environmental laws and regulations, new
interpretations of existing laws, increased governmental scrutiny of safety, health, mining and
environmental laws or other developments in the future will not result in SMC Global Power and
its subsidiaries from being subject to fines and penalties or having to incur additional capital
expenditures or operating expenses to upgrade, supplement or relocate their facilities.
If SMC Global Power or its subsidiaries fails to comply with all applicable regulations or if the
regulations governing its business or their implementation change, SMC Global Power or its
subsidiaries may incur increased costs or be subject to penalties, which could disrupt its
operations and have a material adverse effect on its business and results of operations.
The Company has been compliant with and continues to perform its obligations under
applicable laws and regulations relevant to its businesses.
SMC Global Power and its subsidiaries are in constant consultation with relevant government
agencies and other approving bodies to ensure that all requirements, permits and approvals are
anticipated and obtained in a timely manner. Further, the Company and its subsidiaries
maintains a strong compliance culture and has processes in place in order to manage
adherence to laws and regulations.
ERC Regulation of electricity rates of distribution utilities.
The imposition of more stringent regulations and similar measures by the ERC could have a
material adverse effect on the business, financial conditions and results of operations of SMC
Global Power.
Sales to distribution utilities accounts for majority of the consolidated sales volume of SMC
Global Power for the year ended December 31, 2015. While rates charged by SMC Global
Power through its subsidiaries under their offtake agreements, including those with distribution
utilities, are not regulated by the ERC, the rates that distribution utility customers charge to their
customers are subject to review and approval by the ERC. Accordingly, the ability of distribution
utility customers to pay the subsidiaries of SMC Global Power largely depends on their ability to
pass on their power costs to their customers. There is also no assurance that the current laws,
regulations, and issuances affecting the industry, particularly the EPIRA and the issuances of
the ERC, will not change or be amended in the future.
There is no assurance that the ERC will permit the distribution utility customers of the
subsidiaries of SMC Global Power to pass on or increase their rates or that subsequent reviews
by the ERC will not result in the cancellation of any such increases or require such customers to
refund payments previously received from their customers. There is also no assurance that any
rate increases approved by the ERC will not be overturned by Philippine courts on appeal. SMC
Global Power and other generation companies are parties to a petition filed in the Supreme
Court by special interest groups against Meralco in relation to the increase in generation rates
for the billing months of November and December 2013. The case is pending resolution by the
Supreme Court. The ERC also issued an order dated March 3, 2014 which voided the WESM
prices for the November and December 2013 billing months and imposed prices to be
recalculated by Philippine Electricity Market Corporation (PEMC). SMC Global Power has a
pending request with the ERC to reconsider the ERC Order. The ERC in the exercise of its
regulatory powers may also impose fines, penalties, or sanctions to SMC Global Power in
appropriate cases. Any restriction on the ability of distribution utilities to pass on such costs or
any intervention in such rates could have a material adverse effect on the business, financial
conditions and results of operations of SMC Global Power.
The Company continues to engage in comprehensive discussions and maintains good working
relationship with the ERC to obtain proper resolution of its pending applications for tariff
approval.
41

Trading on the WESM.


While the subsidiaries of SMC Global Power only sell a small amount of power through the
WESM, volatile market conditions on the WESM may nevertheless pose risks to SMC Global
Power regardless of whether there is a shortage or a surplus of energy available. When the
WESM experiences a shortage, there is little risk to suppliers in terms of their value-position
being destroyed. However, such a suppliers market exposes these suppliers to the risk that
regulatory agencies may intervene (directly or indirectly) to dictate prices and dispatch of power
plants. Consumer outrage, triggered by high prices, could precipitate attempts to suspend the
WESM and return to subsidized rates regimes. Regardless of whether such a suspension
ultimately comes to pass, market anticipation of such an occurrence could lead to valuedestructive market distortions. On the other hand, a surplus market tends to cause spot market
prices to reflect the marginal cost of producing power. One of the main features of the WESM is
a merit-order dispatch scheme wherein the cheapest sources of power, such as power
produced from geothermal and hydroelectric energy, are dispatched first, before the more
expensive power providers. While a supplier can mitigate its exposure to surplus risks by
contracting the bulk of its capacity to offtakers to protect against low spot prices, as the
subsidiaries of SMC Global Power have done, this also caps a suppliers ability to take
advantage of price spikes caused by temporary market shortages.
Currently, the ERC has implemented a reduced primary bid cap of 32,000 per MWh. In
addition, a permanent secondary price cap limits spot prices to 6,245 per MWh for as long as
cumulative spot prices breach a certain threshold. Prices are automatically capped at 6,245
per MWh for hours where the average price for the last 168-hours exceeds 9,000 per MWh.
Occurrence of such events could have a material adverse effect on the business, financial
conditions and results of operations of SMC Global Power.
Majority of the capacity of the subsidiaries of the Company is contracted through PSAs with
various offtakers. In addition, the Company continues to engage in comprehensive discussions
and maintains good working relationship with the PEMC to align its trading strategies with
reasonable and acceptable standards and best practices. For further discussions, please refer to
Business Strategies on page 84.
Possible conflicts of interest.
San Miguel Corporation is the sole shareholder of the Issuer, controls the board of directors of
the Issuer and exerts significant influence over the policies, management and affairs of the
Issuer. As a result, San Miguel Corporation is able to exercise significant control and influence
over many corporate actions of the Issuer. The interests of San Miguel Corporation may differ
from those of the Bondholders and San Miguel Corporation may direct the Issuer in a manner
that is contrary to the interests of the Issuer or of the Bondholders. There can be no assurance
that conflicts of interest between the Issuer and San Miguel Corporation will be resolved in favor
of the Issuer or Bondholders.
The Issuer continues to have comprehensive discussions and good relationships with its
stakeholders working towards a common goal of expanding the business, increasing profitability,
and maximizing shareholder value, guided by the manual of good corporate governance.
Dependence on the support of San Miguel Corporation.
SMC Global Power relies upon San Miguel Corporation for certain shared services such as, but
not limited to, human resources, corporate affairs, legal, finance and treasury functions. There is
no guarantee that San Miguel Corporation will continue to provide these services in the future.
Should San Miguel Corporation cease to provide these services, SMC Global Power will have to
obtain these services from elsewhere, most likely at a greater expense, which could have a
negative impact on its business and results of operations.
42

While SMC Global Power relies on certain shared services from San Miguel Corporation, these
are all done at arms length transaction basis. The Company likewise strives to strengthen the
competencies of its employees and pursues strategic hiring for identified critical positions to
minimize its dependence of support from San Miguel Corporation on certain services.
Legal and other proceedings arising out of its operations.
The Company and its subsidiaries, from time to time, may be involved in disputes with various
parties involved in the generation, supply and sale of electric power, including contractual
disputes with subcontractors, suppliers and government agencies such as the legal matters
discussed in Note 28 of the consolidated financial statements of SMC Global Power as of and for
the year ended December 31, 2015. Regardless of the outcome, these disputes may lead to
legal or other proceedings and may result in substantial costs, delays in the operations of the
SMC Global Power. The Company may also have disagreements with regulatory bodies in the
ordinary course of its business, which may subject it to administrative proceedings and
unfavorable decisions that result in penalties and/or delay the development of its greenfield
projects and its current operations. In such cases, the business, financial condition, results of
operations and cash flows of the SMC Global Power could be materially and adversely affected.
SMC Global Power is in constant consultation with relevant government agencies and other
approving bodies to ensure that all requirements, permits and approvals are anticipated and
obtained in a timely manner. The Company also continues to engage in comprehensive
discussions and maintains good working relationship with its employees and other contractual
counterparties. Further, the Company maintains a strong compliance culture and has processes
in place in order to manage adherence to laws, regulations and contractual commitments.
RISKS RELATING TO THE PHILIPPINES
Political instability.
The Philippines has, from time to time, experienced political and military instability. In the last
few years, there has been political instability in the Philippines, including impeachment
proceedings against two (2) former presidents, the Chief Justice of the Supreme Court of the
Philippines, and public and military protests arising from alleged misconduct by previous
administrations. In addition, a number of officials of the Philippine government are currently
under investigation on corruption charges stemming from allegations of misuse of public funds.
There can be no assurance that acts of political violence will not occur in the future and any such
events could negatively impact the Philippine economy. An unstable political environment,
whether due to the imposition of emergency executive rule, martial law or widespread popular
demonstrations or rioting, could negatively affect the general economic conditions and operating
environment in the Philippines, which could have a material adverse effect on the business,
operations, and financial condition of SMC Global Power.
No assurance can be given that the future political or social environment in the Philippines will
be stable or that current and future governments will adopt economic policies conducive for
sustaining economic growth. Political or social instability in the Philippines could negatively affect
the general economic conditions and business environment in the Philippines, which could have
a material adverse effect on the business, operations, and financial position of the Company.
Acts of terrorism, clashes with separatist groups and violent crimes.
The Philippines has also been subject to a number of terrorist attacks since 2000, and the
Armed Forces of the Philippines has been in conflict with groups which have been identified as
being responsible for kidnapping and terrorist activities in the Philippines. In addition, bombings
have taken place in the Philippines, mainly in cities in the southern part of the country. For
example, in September 2013, a faction of the Moro National Liberation Front allegedly led by Nur
Misuari, a former governor of the Autonomous Region of Muslim Mindanao, staged an armed
uprising in Zamboanga City. The incident resulted in, among others, hostage situations and
43

renewed tension between the Philippine Armed Forces and the Moro National Liberation Front in
the southern part of the country. In an operation to capture wanted international terrorist Zulkifli
Bin Hir alias Marwan on January 25, 2015, 44 police commandos were killed in a 12-hour fire
fight with two (2) Muslim rebel groups: Moro Islamic Liberation Front and Bangsamoro Islamic
Freedom Fighters in the Southern Philippines. An increase in the frequency, severity or
geographic reach of these terrorist acts, violent crimes, bombings and similar events could have
a material adverse effect on investment and confidence in, and the performance of, the
Philippine economy.
Territorial and other disputes with neighboring states.
The Philippines, China and several Southeast Asian nations have been engaged in a series of
long standing territorial disputes over certain islands in the West Philippine Sea, also known as
the South China Sea. Despite efforts to reach a compromise, a dispute arose between the
Philippines and China over a group of small islands and reefs known as the Scarborough Shoal.
In April and May 2012, the Philippines and China accused one another of deploying vessels to
the shoal in an attempt to take control of the area, and both sides unilaterally imposed fishing
bans at the shoal during the late spring and summer of 2012. These actions threatened to
disrupt trade and other ties between the two countries, including a temporary ban by China on
Philippine banana imports, as well as a temporary suspension of tours to the Philippines by
Chinese travel agencies. Since July 2012, Chinese vessels have reportedly turned away
Philippine fishing boats attempting to enter the shoal, and the Philippines has continued to
protest Chinas presence there. In January 2013, the Philippines sent notice to the Chinese
embassy in Manila that it intended to seek international arbitration to resolve the dispute under
the United Nations Convention on the Law of the Sea. China has rejected and returned the
notice sent by the Philippines requesting arbitral proceedings. Chinese vessels have also
recently confronted Philippine vessels in the area, and the Chinese government has warned the
Philippines against what it calls provocative actions. Recent talks between the Government and
the United States of America about increased American military presence in the country,
particularly through possible American forays into and use of Philippine military installations, may
further increase tensions. In March 2014, the Philippines filed an arbitration case with the United
Nations Permanent Court of Arbitration in connection with this dispute.
On June 20, 2015, the Government, through the Department of Foreign Affairs, issued a
statement reiterating its serious concern that Chinas reclamation and construction activities in a
disputed part of the West Philippine Sea grossly violate the 2002 Association of Southeast Asian
Nations (ASEAN)-China Declaration on the Conduct of Parties in the South China Sea (DOC)
and may serve to escalate the disputes and undermine efforts to promote peace, security, and
stability. In the same statement, the Philippines called on China anew to heed calls from the
region and the international community to exercise self-restraint in the conduct of activities
pursuant to paragraph 5 of the DOC. In July 2015, the Philippines presented its case in front of
the Arbitration Tribunal in The Hague. The case remains ongoing.
In early March 2013, several hundred armed Filipino-Muslim followers of Sultan Jamalul Kiram
III, the self- proclaimed Sultan of Sulu from the south of the Philippines, illegally entered Lahad
Datu, Malaysia in a bid to enforce the Sultan of Sulus historical claim on the territory. As a result
of the illegal entry, these followers engaged in a three-week standoff with the Malaysian armed
forces, resulting in casualties on both sides. Clashes between the Malaysian authorities and
followers of the Sultan of Sulu have killed at least 98 Filipino-Muslims and 10 Malaysian
policemen army since March 1, 2013. In addition, about 4,000 Filipino-Muslims working in Sabah
have reportedly returned to the southern Philippines.
On May 9, 2013, a Philippine Coast Guard ship opened fire on a Taiwanese fishermans vessel
in a disputed exclusive economic zone between Taiwan and the Philippines, killing a 65-year old
Taiwanese fisherman. Although the Government maintained that the loss of life was unintended,
Taiwan imposed economic sanctions on the Philippines in the aftermath of the incident. Taiwan
eventually lifted the sanctions in August 2013 after a formal apology was issued by the
Government. However, the incident has raised tensions between the two countries in recent
months.
44

Should territorial disputes between the Philippines and other countries in the region continue or
escalate further, the Philippines and its economy may be disrupted and the operations of SMC
Global Power could be adversely affected.
The sovereign credit ratings of the Philippines.
Historically, the Philippines sovereign debt has been rated relatively low by international credit
rating agencies. Although the Philippines long-term foreign currency-denominated debt was
recently upgraded by each of Standard & Poors, Fitch Ratings and Moodys to investmentgrade, no assurance can be given that Standard & Poors, Fitch Ratings or Moodys or any other
international credit rating agency will not downgrade the credit ratings of the Government in the
future and, therefore, Philippine companies. Any such downgrade could have an adverse impact
on the liquidity in the Philippine financial markets, the ability of the Government and Philippine
companies, including SMC Global Power, to raise additional financing and the interest rates and
other commercial terms at which such additional financing is available.
Natural catastrophes.
The Philippines has experienced a number of major natural catastrophes over the years,
including typhoons, floods, volcanic eruptions and earthquakes that may materially disrupt and
adversely affect the business operations of the Company. In particular, damage caused by
natural catastrophes could result disruptions with respect to the IPPA Power Plants of the
Company, its Limay Cogeneration Plant and its greenfield power plants. There can be no
assurance that SMC Global Power is fully capable to deal with such natural catastrophes and
that the insurance coverage it currently maintains for its Limay Cogeneration Plant and its
greenfield power plants will fully compensate it for all the damages and economic losses
resulting from these catastrophes.
Management of risks related to the Philippines
The Company has been able to survive major economic and political crises brought about by
domestic and international developments through the implementation of its core strategies,
including least cost formulations, efficiencies improvement, market leadership, innovation and
regional diversification. Constant monitoring of market allows the Company to detect risk
exposures and react to the external environment appropriately. Although there is no assurance
that the Company will be able to fully overcome the adverse effects of any or all crisis, it has in
place a system of financial prudence and corporate governance that provides the foundation for
its risk management initiatives.
RISKS RELATING TO THE BONDS
Liquidity.
The Company plans to list the Bonds in the PDEx to provide price transparency and liquidity to
the Bondholders. As with other fixed income securities, the Bonds could trade at prices higher or
lower than the initial offering price due to prevailing interest rates, the operations of the
Company, the overall market for debt securities, political and economic developments in the
Philippines and other regions, among others. It is possible that a selling Bondholder would
receive sales proceeds lower than his initial investment should a Bondholder decide to sell his
Bonds prior to maturity.
In addition, there can be no assurance that an active secondary market for the Bonds will
develop or how the Bonds will perform. The liquidity and the market prices for the Bonds can be
expected to vary with changes in market and economic conditions, the financial position and
prospects of the Company and other factors that generally influence the market prices of
securities.

45

Reinvestment.
Upon the occurrence of certain events such as a change in Philippine tax or regulatory laws or
their general application or interpretation having an effect on the Company, the Bonds could be
redeemed in whole but not in part prior to the Maturity Date. In such an event, the Bonds shall be
redeemed at the relevant Issue Price plus accrued interest.
The Company may also exercise its redemption option, as described under the section
Description of the Bonds Redemption and Purchase. The amount payable to the
Bondholders in respect of such redemptions shall be calculated based on the principal amount of
the Bonds being redeemed, as the sum of (i) accrued interest on the Bonds on the Optional
Redemption Date; and (ii) the product of the principal amount and the applicable Optional
Redemption Price in accordance with the following schedule:
Early Redemption Option Date on
Series A bonds

Early
Redemption
Price

Third (3rd) anniversary from Issue


Date

101.0%

Fourth (4th) anniversary from Issue


Date

100.5%

Early Redemption Option Date on


Series B Bonds

Early
Redemption
Price

Fifth (5th) anniversary from Issue


Date

101.0%

Sixth (6th) anniversary from Issue


Date

Early Redemption Option Date on


Series C Bonds

100.5%

Early
Redemption
Price

Seventh anniversary (7th) from Issue


Date

102.0%

Eight (8th) anniversary from Issue


Date

101.0%

Ninth (9th) anniversary from Issue


Date

100.5%

There is no assurance that, after such redemption, investors will be able to reinvest in alternative
securities with comparable yields.
Pricing
The market value of the Bonds moves (either up or down) depending on the change in interest
rates prevailing in the market. The Bonds when sold in the secondary market may be worth more
if such interest rates decrease if the Bonds have a higher interest rate relative to the market.
Likewise, if the prevailing interest rates increase, the Bonds may be worth less when sold in the
46

secondary market. Therefore, an investor may sustain losses if he decides to sell.


Retention of Ratings
There is no assurance that the rating of the bonds will be retained throughout the life of the
bonds. The rating is not a recommendation to buy, sell, or hold securities and may be subject to
revision, suspension, or withdrawal at any time by the assigning rating organization.
Bonds have no Preference under Article 2244(14) of the Civil Code
No other loan or other debt facility currently or to be entered into by the Issuer is notarized, such
that no other loan or debt facility to which the Issuer is a party shall have preference of priority
over the Bonds as accorded to public instruments under Article 2244(14) of the Civil Code of the
Philippines, and all banks and lenders under any such loans or facilities have waived the right to
the benefit of any such preference or priority. However, should any bank or Bondholder
hereinafter have a preference or priority over the Bonds as a result of notarization, then at the
option of the Issuer, either procure a waiver of the preference created by such notarization or
equally and ratably extend such preference to the Bonds.
RISKS RELATING TO STATEMENTS MADE IN THIS PROSPECTUS
Certain statistics in this Prospectus relating to the Philippines, the industries and markets in
which the business of the Company operates, including statistics relating to market size and
market share, are derived from various Government and private publications, including those
produced by industry associations and research groups. This information has not been
independently verified and may not be accurate, complete, up-to-date or consistent with other
information compiled within or outside the Philippines.

47

USE OF PROCEEDS
The Company intends to use the proceeds of this Offer to refinance the outstanding short term
loan with BDO drawn on January 25, 2016 in the amount of U.S.$300 million to mature on July
25, 2016. The Issuer shall source the U.S. dollars to pay said short term loan from internally
available funds. The short term loan was used to redeem the U.S.$300 million 7.0% Notes due
2016 of SMC Global Power. The balance will be used for payment of related transaction fees,
costs and expenses and for general corporate purposes (the Company may use a portion of the
proceeds on other purposes such as operations-related expenses, e.g. overhead expenses and
taxes).
BDO Capital, BPI Capital, China Bank Capital, MATRKE, PNB Capital, RCBC Capital, SB
Capital, SCB and UCPB are the Joint Issue Managers, Joint Lead Underwriters and
Bookrunners of the Offer.
BDO Capital is a wholly-owned subsidiary of BDO. BDO will receive full payment out of the
proceeds of the Offer as the Lender under the short term loan.
The Company expects that the net proceeds of the Offering shall amount to approximately
14,828,543,589 after payment of fees, commissions and expenses.
Net proceeds from the Offering are estimated to be at least as follows:

For a 15.0 billion Issue Size


Total
15,000,000,000
Documentary Stamp Tax
SEC Registration Fee
SEC Legal Research and Publication Fee
SEC Publication Fee
Gross Underwriting Fee and Other Professional
Fees
PDEX Listing Application Fee
Printing Cost
Trustee Fees
Paying Agency and Registry Fees
Miscellaneous Fees

75,000,000
4,355,625
55,625
100,000
90,645,161
300,000
200,000
300,000
200,000
300,000
171,456,411
TOTAL
14,828,543,589

In the event of any substantial deviation/adjustment in the planned use of proceeds, the
Company shall inform the SEC and the Bondholders within a reasonable period of time prior to
its implementation.
Pending disbursement for the refinancing of the outstanding short term loan, the Company
intends to invest the net proceeds from the Offer in short-term liquid investments including, but
not limited to, short-term government securities, bank deposits and money market placements
which are expected to earn prevailing market rates.
No material amount of proceeds shall be used to reimburse any officer, director, employee, or
shareholder for services rendered, assets previously transferred, money loaned or advanced, or
otherwise.

48

DETERMINATION OF OFFER PRICE


The Bonds shall be issued at 100% of principal amount or face value.

49

PLAN OF DISTRIBUTION
SMC Global Power plans to issue the Bonds to institutional and retail investors through a
general public offering to be conducted through the Joint Issue Managers, Joint Lead
Underwriters and Bookrunners.
JOINT ISSUE MANAGERS, JOINT LEAD UNDERWRITERS AND BOOKRUNNERS
The Joint Issue Managers, Joint Lead Underwriters and Bookrunners, pursuant to an
Underwriting Agreement with SMC Global Power executed on June 23, 2016, (the
Underwriting Agreement), have agreed to act as the Underwriters for the Offer and as such,
distribute and sell the Bonds at the Offer Price. Subject to the fulfillment of the conditions
provided in the Underwriting Agreement, the Joint Issue Managers, Joint Lead Underwriters and
Bookrunners have committed to underwrite the following amounts on a firm basis:
Joint Issue Managers, Joint Lead
Underwriters and Bookrunners
BDO Capital
BPI Capital
China Bank Capital
MATRKE
PNB Capital
RCBC Capital
SB Capital
SCB
UCPB
TOTAL

Underwriting Commitment
1,666,670,000
1,666,670,000
1,666,670,000
1,666,670,000
1,666,670,000
1,666,670,000
1,666,660,000
1,666,660,000
1,666,660,000
15,000,000,000

There is no arrangement for any of the Joint Issue Managers, Joint Lead Underwriters and
Bookrunners to put back to the Issuer any unsold Bonds.
The Issuer shall pay each of the Joint Issue Managers, Joint Lead Underwriters and
Bookrunners a fee of 0.50% based on its underwriting commitment, which shall be grossed up
for gross receipts tax of 7%. The fees due to the Joint Issue Managers, Joint Lead Underwriters
and Bookrunners together with any applicable gross receipts tax or its equivalent less any
applicable withholding tax arising in respect of such fee, shall be due and payable by the Issuer
to the Joint Issue Managers, Joint Lead Underwriters and Bookrunners immediately upon receipt
of confirmation from the bank of the Issuer that cleared funds representing payments for all
accepted Applications to Purchase have been credited to the account designated by the Issuer.
The Issue Management and Underwriting Agreement may be terminated or suspended by the
Joint Issue Managers, Joint Lead Underwriters and Bookrunners under certain circumstances
prior to the issuance of the Bonds and payment being made to the Company of the net
proceeds of the Bonds. The Joint Issue Managers, Joint Lead Underwriters and Bookrunners
are duly licensed by the SEC to engage in underwriting or distribution of the Bonds. The Joint
Issue Managers, Joint Lead Underwriters and Bookrunners may, from time to time, engage in
transactions with and perform services in the ordinary course of business for the Company. The
Joint Issue Managers, Joint Lead Underwriters and Bookrunners have no direct relations with
the Company in terms of ownership by either of their respective major stockholder(s), and have
no right to designate or nominate any member of the Board of Directors of the Company.

50

BDO Capital was incorporated in the Philippines in December 1998. It is duly licensed by the
SEC to operate as an investment house and was licensed by the SEC to engage in underwriting
or distribution of securities to the public. As of December 31, 2014, it had 3.04 billion and 2.26
billion in consolidated resources and capital, respectively. It has an authorized capital stock of
400 million, of which approximately 300 million represents its paid-up capital.
BPI Capital offers investment banking services in the areas of financial advisory, mergers and
acquisitions, debt and equity underwriting, private placements, project finance and loan
syndication. Founded in December of 1994, BPI Capital is duly licensed by the SEC to engage in
the underwriting and distribution of securities. As of December 31, 2014, BPI Capital had total
assets of 5.36 billion and total capital funds of 5.17 billion. The firm operates as a whollyowned subsidiary of the Bank of the Philippine Islands.
China Bank Capital, a subsidiary of China Banking Corporation, provides a wide range of
investment banking services to clients across different sectors and industries. Its primary
business is to help enterprises raise capital by arranging or underwriting debt and equity
transactions, such as project financing, loan syndications, bonds and notes issuances,
securitizations, initial and follow-on public offerings, and private equity placements. China Bank
Capital also advises clients on structuring, valuation, and execution of corporate transactions,
including mergers, acquisitions, divestitures, and joint ventures. It was established and licensed
as an investment house in 2015 as the spin-off of China Banking Corporation's investment
banking group, which was organized in 2012.
MATRKE was incorporated in the Philippines on September 4, 1990. It is duly licensed by the
SEC to operate as an investment house and, as such, to engage in underwriting or distribution of
securities to the public. As of December 31, 2014, its total assets amounted to 3.5 billion and
its capital base (or equity) amounted to approximately 1.5 billion. It has authorized capital
shares of 15.94 million (9,940,000 common shares and 6,000,000 preferred shares), of which
approximately 870.8 million represents its paid-up capital. Its senior executives have extensive
experience in the capital markets and were involved in lead roles in a substantial number of
major equity and debt issues, both locally and internationally.
PNB Capital, an investment house was incorporated on July 30, 1997 and commenced
operations on October 8, 1997. It is a wholly-owned subsidiary of the Philippine National Bank.
As of December 31, 2015, it had an authorized and paid-up capital of 350.0 million. Its principal
business is providing investment banking services, namely: debt underwriting (bonds,
commercial papers), equity underwriting, private placements, loan syndications and financial
advisory services. PNB Capital is authorized to buy and sell for its own account, securities
issued by private corporations and the government of the Philippines. As of December 31, 2015,
total assets of PNB Capital were at 722.5 million while total capital was at 629.9 million.
RCBC Capital is a licensed investment house providing a complete range of capital-raising and
financial advisory services. Established in 1974, RCBC Capital has over 40 years of experience
in the underwriting of equity, quasi-equity and debt securities, as well as in managing and
arranging the syndication of loans, and in financial advisory. RCBC Capital is a wholly owned
subsidiary of the Rizal Commercial Banking Corporation and a part of the Yuchengco Group of
Companies, one of the countrys largest fully integrated financial services conglomerates. As of
December 31, 2015, RCBC Capitals total assets were 3.56 billion while total capital was 3.51
billion.
SB Capital is a Philippine corporation organized in October 1995 as a wholly-owned subsidiary
of Security Bank Corporation. It obtained its license to operate as an investment house in 1996
and is licensed by the SEC to engage in underwriting and distribution of securities to the public.
SB Capital provides a wide range of investment banking services including financial advisory,
underwriting of equity and debt securities, project finance, privatizations, mergers and
acquisitions, loan syndications and corporate advisory services. SB Capital is also involved in
equity trading through its wholly-owned stock brokerage subsidiary, SB Equities, Inc. Its senior
executives have extensive experience in the capital markets and were involved in a lead role in a
substantial number of major equity and debt issues, both locally and internationally.
51

SCB is a banking corporation duly organized and incorporated in England with limited liability by
Royal Charter in 1853, and licensed to act as a banking institution under and by virtue of the
laws of the Republic of the Philippines through its Branch Office, with 15 principal offices in
Makati City. It has operated for over 150 years in some of the worlds most dynamic markets and
earns more than 90% of its profits in Asia, Africa, and Middle East. Operating in the Philippines
since 1872, SCB is a universal bank and is the longest established foreign bank in the country.
The principal banking products include deposits, lending and related services, treasury and
capital market operations, trade services, payments and cash management, credit cards, and
custodial services. The bank also provides capital raising solutions such as local currency and
G3 currency fixed income and loan syndications.
UCPB was established in 1963 as a commercial bank and grew to become the first private
Philippine universal bank in 1981, thus enabling it to invest in non-allied businesses. Today, with
assets over 200 billion, 188 branches throughout the country and over fifty years of banking
experience, UCPB is confident in the core strengths it has developed. UCPB offers a full range
of expanded commercial banking services. The bank has strong capabilities in corporate
banking, commercial credit, international trade financing, treasury and money market operations,
trust banking, and consumer banking.
BDO Capital is a wholly-owned subsidiary of BDO. BDO will receive full payment out of the
proceeds of the Offer as the Lender under the short term loan.
SALE AND DISTRIBUTION
The sale and distribution of the Bonds shall be undertaken by the Joint Issue Managers, Joint
Lead Underwriters and Bookrunners who shall sell and distribute the Bonds to third party
buyers/investors. Nothing herein shall limit the rights of the Joint Issue Managers, Joint Lead
Underwriters and Bookrunners from purchasing the Bonds for their own respective accounts.
There are no persons to whom the Bonds are allocated or designated. The Bonds shall be
offered to the public at large and without preference.
The Joint Issue Managers, Joint Lead Underwriters and Bookrunners are authorized to organize
a syndicate of participating underwriters for the purpose of the Offer. However, the Joint Issue
Managers, Joint Lead Underwriters and Bookrunners shall remain solely responsible to the
Issuer in respect of their obligations under the Issue Management and Underwriting Agreement
entered into by them with the Issuer and the Issuer shall not be bound by any of the terms and
conditions of any agreement entered into by the Joint Issue Managers, Joint Lead Underwriters
and Bookrunners with the participating underwriters. The Company has no obligation to any
member of such syndicate for the payment of any fee, underwriting or participating commissions.
TERM OF APPOINTMENT
The engagement of the Joint Issue Managers, Joint Lead Underwriters and Bookrunners shall
subsist in accordance with the terms of the Issue Management and Underwriting Agreement.
The obligations of each of the Joint Issue Managers, Joint Lead Underwriters and Bookrunners
will be several, and not solidary, and nothing in the Underwriting Agreement shall be deemed to
create a partnership or joint venture between and among any of the Joint Issue Managers, Joint
Lead Underwriters and Bookrunners. Unless otherwise expressly provided in the Underwriting
Agreement, the failure by a Joint Issue Manager, Joint Lead Underwriter and Bookrunner to
carry out its obligations thereunder shall neither relieve the other Joint Issue Managers, Joint
Lead Underwriters and Bookrunners of their obligations under the same Underwriting
Agreement, nor shall any Joint Issue Manager, Joint Lead Underwriter and Bookrunner be
responsible for the obligation of another Joint Issue Manager, Joint Lead Underwriter and
Bookrunner.

52

MANNER OF DISTRIBUTION
The Joint Issue Managers, Joint Lead Underwriters and Bookrunners and the Issuer shall agree
on the procedure for application, acceptance, or rejection of the Applications to Purchase,
whether in whole or in part (the Allocation Plan). Consistent with bank procedures and the
Allocation Plan, each of the Joint Issue Managers, Joint Lead Underwriters and Bookrunners
shall observe the policies and procedures regarding acceptance of Applications to Purchase,
evaluation and assessment of such applications and supporting documentary requirements,
allocations of the Bonds to clients and acceptance of deposits of its potential investors.
OFFER PERIOD
The Offer Period shall commence at 9:00 AM of June 27, 2016 and end at 12:00 NN of July 1,
2016 or such other dates as may be determined by the Issuer and Joint Issue Managers, Joint
Lead Underwriters and Bookrunners.
APPLICATION TO PURCHASE
All Applications to Purchase the Bonds shall be evidenced by a duly completed and signed
Application to Purchase, together with two fully executed signature cards authenticated by the
Corporate Secretary or any equivalent authorized officer with respect to corporate and
institutional investors. The purchase price must be paid in full in Pesos upon the submission of
the duly completed and signed Application to Purchase and signature card together with the
requisite attachments. Payment for the Bonds shall be made either by: (i) a personal or
corporate check drawn against an account with an authorized bank of the Bangko Sentral ng
Pilipinas (BSP) at any of its branches located in Metro Manila; or (ii) a managers or cashiers
check issued by an authorized bank. All checks should be made payable to SMC Global Power
Bonds Offering, crossed Payees Account Only, and dated the same date as the Application.
The Applications and the related payments will be received at any of the offices of the Joint
Issue Managers, Joint Lead Underwriters and Bookrunners. Applicants submitting their
Application to a Joint Issue Manager, Joint Lead Underwriter and Bookrunner may also remit
payment for their Bonds through the Real Time Gross Settlement (RTGS) facility of the BSP to
the Joint Issue Manager, Joint Lead Underwriter and Bookrunner to whom such Application was
submitted or via direct debit to their deposit account maintained with such Joint Issue Manager,
Joint Lead Underwriter and Bookrunner. Cash payments shall not be accepted.
Should the applicant elect to pay through RTGS, the Application should be accompanied by an
instruction issued by the applicant to effect payment through RTGS in an amount equal to the
total Offer Price of the Bonds applied for, to be effected and fully funded not later than 12:00 NN
of July 1, 2016.
Should the applicant elect to pay by a debit memo or instruction, the Application should be
accompanied by a debit memo or instruction issued by the applicant in an amount equal to the
total Offer Price applied for in favor of the Joint Issue Managers, Joint Lead Underwriters and
Bookrunners to whom the Application is submitted, to be effected no later than 12:00 NN of July
1, 2016.
Corporate and institutional purchasers must also submit a copy of SEC-certified or corporate
secretary (or any equivalent authorized officer) certified true copy of the SEC Certificate of
Registration, Articles of Incorporation and By-laws, General Information Sheet, or such other
relevant organizational or charter documents, and the original or corporate secretary or any
equivalent officer-certified true copy of the duly notarized certificate confirming the resolution of
the board of directors and/or committees or bodies authorizing the purchase of the Bonds and
designating the authorized signatory/ies therefore. Individual applicants must also submit a
photocopy of any one of the following identification cards (ID): passport/driver's license,
company ID, Social Security System/Government Service and Insurance System ID and/or
Senior Citizen's ID or such other ID and documents as may be required by or acceptable to the
selling bank.
53

An applicant who is exempt from or is not subject to withholding tax or who claims reduced tax
treaty rates shall, in addition, be required to submit the following requirements to the relevant
Joint Issue Manager, Joint Lead Underwriter and Bookrunner (together with their Applications)
who shall then forward the same to the Registrar and Paying Agent, subject to acceptance by
the Company as being sufficient in form and substance: (i) certified true copy of the original tax
exemption certificate, ruling or opinion issued by the BIR on file with the applicant as certified by
its duly authorized officer; (ii) with respect to tax treaty relief, proofs to support applicability of
reduced treaty rates, consularized proof of tax domicile issued by the relevant tax authority of the
Bondholder, and original or SEC-certified true copy of the SEC confirmation that the relevant
entity is not doing business in the Philippines; (iii) an original of the duly notarized undertaking, in
the prescribed form, declaring and warranting its tax-exempt status, undertaking to immediately
notify the Company and the Registrar and Paying Agent of any suspension or revocation of its
tax-exempt status and agreeing to indemnify and hold the Company, the Registrar and Paying
Agent and the Paying Agent free and harmless against any claims, actions, suits, and liabilities
resulting from the non-withholding or reduced withholding of the required tax; and (iv) such other
documentary requirements as may be required under the applicable regulations of the relevant
taxing or other authorities.
The Joint Issue Managers, Joint Lead Underwriters and Bookrunners shall be responsible for
accepting or rejecting any Application or scaling down the amount of Bonds applied for. The
Application, once accepted, shall constitute the duly executed purchase agreement covering the
amount of Bonds so accepted and shall be valid and binding on the Company and the applicant.
MINIMUM PURCHASE
A minimum purchase of Fifty Thousand Pesos (50,000.00) shall be considered for acceptance.
Purchases in excess of the minimum shall be in multiples of Ten Thousand Pesos (10,000.00).
ALLOTMENT OF THE BONDS
If the Bonds are insufficient to satisfy all Applications to Purchase, the available Bonds shall be
allotted in accordance with the chronological order of submission of properly completed and
appropriately accomplished Applications to Purchase on a first-come, first-served basis, without
prejudice and subject to the right of rejection of SMC Global Power.
ACCEPTANCE OF APPLICATIONS
SMC Global Power and the Joint Issue Managers, Joint Lead Underwriters and Bookrunners
reserve the right to accept or reject applications to subscribe in the Bonds, and in case of
oversubscription, allocate the Bonds available to the applicants in a manner they deem
appropriate. If any application is rejected or accepted in part only, the application money or the
appropriate portion thereof will be returned without interest by the relevant Joint Issue Manager,
Joint Lead Underwriter and Bookrunner.
REFUNDS
In the event an Application to Purchase is rejected or the amount of Bonds applied for is scaled
down, the relevant Joint Issue Manager, Joint Lead Underwriter and Bookrunner, upon receipt of
the Allocation Report, shall notify the applicant concerned that his application has been rejected
or that the amount of Bonds applied for is scaled down. Payments made by the applicants
whose Applications to Purchase are rejected or scaled down will be returned to them no later
than three Business Days after the Issue Date by the relevant Joint Issue Manager, Joint Lead
Underwriter and Bookrunner to whom the Application to Purchase was submitted, in full (in case
of a rejection) or in a proportionate sum corresponding to the amount of the Bonds partially
rejected (in case of a scale down), but in both instances without any interest whatsoever. Refund
shall be made either (i) through the issuance of a check payable to the order of the applicant and
crossed Payees Account Only and mailed or delivered, at the risk of the applicant, to the
address specified in the Application to Purchase; or (ii) through the issuance of instructions for
automatic credit payments to the accounts of the relevant applicants, as indicated in their
54

respective Applications to Purchase. The Issuer and the Joint Issue Managers, Joint Lead
Underwriters and Bookrunners shall not be liable in any manner to the applicant for any refund
corresponding to any rejected or scaled-down Application to Purchase which is not transmitted
by the relevant Joint Issue Manager, Joint Lead Underwriter and Bookrunner. In such case, the
relevant Joint Issue Manager, Joint Lead Underwriter and Bookrunner shall be responsible
directly to their respective applicants for the actual refund of the payment.
REGISTER OF BONDHOLDERS
The Bonds shall be issued in scripless form and shall be registered in the scripless Register of
Bondholders maintained by the Registrar. A Master Certificate of Indebtedness representing the
Bonds sold in the Offer shall be issued to and registered in the name of the Trustee, on behalf of
the Bondholders.
Legal title to the Bonds shall be shown in the Register of Bondholders to be maintained by the
Registrar. The names and addresses of the Bondholders and the particulars of the Bonds held
by them and of all transfers of Bonds shall be entered into the Register of Bondholders.
Transfers of ownership shall be effected through book-entry transfers in the scripless Register of
Bondholders.

55

DESCRIPTION OF THE BONDS


The following does not purport to be a complete listing of all the rights, obligations, or privileges
of the Bonds. Some rights, obligations, or privileges may be further limited or restricted by other
documents. Prospective investors are enjoined to carefully review the articles of incorporation,
by-laws and resolutions of the Board of Directors and Stockholders of SMC Global Power
submitted to the SEC, the information contained in this Prospectus, the Trust Agreement,
Registry and Paying Agency Agreement (RPAA), Issue Management and Underwriting
Agreement, and other documents relevant to the Offer. Prospective investors are likewise
encouraged to consult their legal counsels and accountants in order to be better advised of the
circumstances surrounding the issued Bonds.
The issue of the Bonds was authorized by a resolution of the Board of Directors of the Issuer
passed on April 11, 2016. The Bonds shall be governed by a Trust Agreement executed on
June 23, 2016 (the Trust Agreement) between the Issuer and Philippine National Bank
Trust Banking Group (the Trustee). The Trustee has no interest in or relation to the Issuer
which may conflict with the performance of its functions. The description of the terms and
conditions of the Bonds set out below includes summaries of, and is subject to, the detailed
provisions of the Trust Agreement. The RPAA was executed on June 23, 2016, between the
Issuer and PDTC. The Bonds will be offered and sold through a general public offering in the
Philippines, and issued in minimum principal amounts of 50,000.00, and multiples of
10,000.00 in excess thereof, and traded in amounts of 10,000.00 as a minimum, and in
multiples of 10,000.00 in excess thereof. While the Issuer has the discretion to allocate the
principal amount among the Series A Bonds, Series B Bonds and Series C Bonds based on
the bookbuilding process, the Issuer may opt not to allocate any of the principal amount to any
of these series. The Series A Bonds shall mature on July 11, 2021, Series B Bonds shall
mature on July 11, 2023 and the Series C Bonds shall mature on July 11, 2026, (the Maturity
Dates), unless earlier redeemed by the Issuer pursuant to the terms thereof and subject to the
provisions on redemption and payment as summarized below.
Copies of the Trust Agreement and the RPAA will be available for inspection during normal
business hours at the specified offices of the Trustee. The Bondholders are entitled to the
benefit of, are bound by, and are deemed to have notice of, all the provisions of the Trust
Agreement and the RPAA applicable to them.
FORM, DENOMINATION AND TITLE
Form and Denomination
The Bonds are in scripless form, and will be issued in denominations of 50,000.00 each, as a
minimum, and in multiples of 10,000.00 in excess thereof.
Title
Legal title to the Bonds will be shown in the Register of Bondholders. A notice confirming the
principal amount of the Bonds purchased by each applicant in the offer for sale, distribution and
issuance of the Bonds by the Issuer will be issued by the Registrar to all Bondholders after the
Issue Date. Upon any assignment, title to the Bonds shall pass by recording of the transfer
from the transferor to the transferee in the Register of Bondholders Settlement with respect to
such transfer or change of title on the Bonds, including the settlement of any cost arising from
such transfers, including, but not limited to, documentary stamp taxes, if any, arising from
subsequent transfers, shall be for the account of the relevant Bondholder.

56

BOND RATING
The Bonds have been rated Aaa by PhilRatings. The rating is subject to regular annual review,
or more frequently as market developments may dictate, for as long as the Bonds are
outstanding.
In formulating its rating, PhilRatings considered the good market standing of the Company
despite its relatively short operating history, strong parent company support and synergies
derived from San Miguel Corporation with a team of experienced professionals managing the
Company, and the sound cash generating ability from operations of the Company. PhilRatings
also considered the impact of foreign exchange movements on the profitability of the Company
and the outstanding legal issues that may have an impact on operations of SMC Global Power.
TRANSFER OF BONDS
Register of Bondholders
The Issuer will cause the Register of Bondholders to be kept by the Registrar, in electronic
form. The names and addresses of the Bondholders and the particulars of the Bonds held by
them and of all transfers and assignments of the Bonds, including any liens and encumbrances
thereon, shall be entered into the Register of Bondholders. As required by Circular No. 428-04
issued by the BSP, the Registrar shall send each Bondholder a written statement of registry
holdings at least every quarter (at the cost of the Issuer) and a written advice confirming every
receipt or transfer of the Bonds that is effected in the system of the Registrar (at the cost of the
relevant Bondholder). Such statement of registry holdings shall serve as the confirmation of
ownership of the relevant Bondholder as of the date thereof. Any requests of Bondholders for
certifications, reports or other documents from the Registrar, except as provided herein, shall
be for the account of the requesting Bondholder. No transfer of the Bonds may be made during
the period commencing on a Record Date as defined in the Section on Interest Payment Date
until the relevant Payment Date.
Transfers; Tax Status
The Bonds may be transferred upon exchange of confirmation of sale and confirmation of
purchase, or by book entry in recording platforms maintained by approved securities dealers.
The Registrar shall ultimately and conclusively determine all matters regarding the evidence
necessary to effect any such transfer. Settlement in respect of such transfer or change of title
to the Bonds, including the settlement of any documentary stamp taxes, if any, arising from
subsequent transfers, shall be settled directly between the transferee and/or the transferor
Bondholders.
Subject to the provisions of the RPAA, Bondholders may transfer their Bonds at anytime to a
transferee of the same tax status. Transfers across tax categories shall not be allowed except
on Interest Payment Dates that fall on a business day. Restricted transfers include, but are not
limited to, transfers between taxable and non-taxable entities, between taxable entities of
different tax categories (where tax-withheld entities with different final withholding tax rates
(e.g. 20%, 25%, 30%) are considered as belonging to different tax categories), or between
parties who claim the benefit of a tax treaty; provided, however, that transfers from a taxexempt category to a taxable tax category on a non-Interest Payment Date shall be allowed
using the applicable tax-withheld series name to ensure that the computation is based on the
final withholding tax rate of the taxable party to the trade. For such transactions, the tax-exempt
entity shall be treated as belonging to the same tax category as its taxable counterpart for the
interest period within which such transfer occurred.
A Bondholder claiming tax-exempt status is required to submit a written notification of the sale
or purchase to the Trustee and the Registrar, including the tax status of the transferor or
transferee, as appropriate, together with the supporting documents specified under the RPAA
within three (3) Business Days from the settlement date for such transfer. Such Bondholder
must also submit the documents for claiming tax exemption or entitlement to preferential tax
57

rates as required under the RPAA to the Registrar no later than three (3) Business Days prior
to the Record Date. Otherwise, the Bondholders will be treated as taxable on Record Date.
Notwithstanding the submission by the Bondholder, or the receipt by the Issuer, the Registrar,
the Joint Issue Managers, Joint Lead Underwriters and Bookrunners of documentary proof of
tax-exempt status of a Bondholder, the Issuer may, in its sole and reasonable discretion,
determine that such Bondholder is taxable and require the Registrar and Paying Agent to
proceed to apply the tax due on the Bonds. Any question on such determination shall be
referred to the Issuer.
The Bondholders shall be responsible for monitoring and accurately reflecting their tax status in
the Register of Bondholders. The payment report to be prepared by the Registrar and
submitted to the Issuer in accordance with the RPAA, which shall be the basis of payments on
the Bonds on any Payment Date, shall reflect the tax status of the Bondholders as indicated in
their accounts as of the Record Date.
SECONDARY TRADING
The Issuer intends to list the Bonds in PDEx for secondary market trading. The Bonds will be
traded in a minimum board lot size of 10,000.00 as a minimum, and in multiples of
10,000.00 in excess thereof for so long as any of the Bonds are listed in PDEx. Secondary
market trading in PDEx shall follow the applicable PDEx rules and conventions and guidelines,
including rules, conventions and guidelines governing trading and settlement between
Bondholders of different tax status, and shall be subject to the relevant fees of PDEx and
PDTC, all of which shall be for the account of the Bondholders.
RANKING
The Bonds constitute direct, unconditional, unsecured and unsubordinated obligations of the
Issuer and will rank pari passu and ratably without any preference or priority amongst
themselves and at least pari passu with all other present and future, contingent or otherwise,
unsecured and unsubordinated obligations of the Issuer, except for any statutory preference or
priority established by law.
INTEREST
Interest Payment Dates
Each Series A Bond bear interest on its principal amount from and including Issue Date at the
rate of 4.3458% per annum, payable quarterly in arrears on January 11, April 11, July 11, and
October 11 of each year commencing on October 11, 2016 or the subsequent Business Day
without adjustment if such Interest Payment Date is not a Business Day (each of which, for
purposes of this clause is an Interest Payment Date).
Each Series B Bond bear interest on its principal amount from and including Issue Date at the
rate of 4.7575% per annum, payable quarterly in arrears on January 11, April 11, July 11, and
October 11 of each year commencing on October 11, 2016 or the subsequent Business Day
without adjustment if such Interest Payment Date is not a Business Day (each of which, for
purposes of this clause is an Interest Payment Date).
Each Series C Bond bear interest on its principal amount from and including Issue Date at the
rate of 5.1792% per annum, payable quarterly in arrears on January 11, April 11, July 11, and
October 11 of each year commencing on October 11, 2016 or the subsequent Business Day
without adjustment if such Interest Payment Date is not a Business Day (each of which, for
purposes of this clause is an Interest Payment Date).
The cut-off date in determining the existing Bondholders entitled to receive interest, principal or
any amount due under the Bonds shall be the second (2nd) Business Day immediately
preceding the relevant Payment Date (the Record Date). No transfers of the Bonds may be
made during this period intervening between and commencing on the Record Date and the
58

relevant Interest Payment Date.


Interest Accrual
Each Bond will cease to bear interest on the Maturity Date, unless, upon due presentation,
payment of the full amount due is improperly withheld or refused or default is otherwise made
in respect of such payment, in which case, the Penalty Interest (see Penalty Interest below),
will apply.
Calculation of Interest
The interest shall be calculated on the basis of a 360-day year consisting of 12 months of 30
days each and, in the case of an incomplete month, the number of days elapsed on the basis
of a month of 30 days.
REDEMPTION AND PURCHASE
Final Redemption
Unless earlier redeemed, purchased and cancelled in accordance with the Trust Agreement,
the Series A Bonds, Series B Bonds and Series C Bonds will be redeemed at par or 100.00%
of their face value on their respective Maturity Dates. However, payment of all amounts due on
the Bonds on such dates may be made by the Issuer through the Paying Agent, without
adjustment, on the succeeding Business Day if the relevant Maturity Date is not a Business
Day.
Early Redemption due to Taxation, Change in Law or Circumstance
If payments under the Bonds become subject to additional or increased taxes other than the
taxes prevailing on the Issue Date as a result of certain Changes in Law, and such additional or
increased rate of such tax cannot be avoided by use of reasonable measures available to the
Issuer, then the Issuer may redeem the Bonds in whole, but not in part, on any Interest
Payment Date (having given not more than 60 days nor less than 30 days notice to the
Trustee, the Registrar and the Paying Agent) at par plus accrued interest; provided that if the
Issuer does not redeem the Bonds then all payments of principal and interest in respect of the
Bonds shall be made free and clear of, and without withholding or deduction for, any such new
or additional taxes, duties, assessments or governmental charges, unless such withholding or
deduction is required by law. In that event, the Issuer shall pay to the Bondholders concerned,
such additional amount as will result in the receipt by the Bondholders of such amounts as
would have been received by them had no such withholding or deduction for new or additional
taxes been required.
In the event that there shall hereafter occur any Change in Law, or any approval, permit,
license, consent, authorization, registration, exemption, concession, franchise, privilege, or any
other right to be granted or granted by the Government to the Issuer now or hereafter
necessary for the conduct of the business or operations of the Issuer is not obtained, or is
subsequently terminated, withdrawn, rescinded, or amended, and the result of any of the
foregoing, as determined by the Issuer, will materially and adversely affect the ability of the
Issuer to comply with its obligations under the Bonds or the Trust Agreement or the financial
position or operations of the Issuer, then the Issuer may redeem the Bonds at any time in
whole, but not in part (having given not more than 60 days nor less than 30 days notice to the
Trustee, the Registrar and the Paying Agent from the time of the occurrence of the event) at
par plus accrued interest.
If any provision of the Issue Management and Underwriting Agreement, Trust Agreement, or
the RPAA shall become, for any reason, invalid, illegal or unenforceable, or any act or
condition or thing required to be done, fulfilled or performed at any time by the Issuer is not
done, fulfilled or performed, to the extent that it will become unlawful for the Issuer to give
effect to its rights and obligations under the Issue Management and Underwriting Agreement,
59

Trust Agreement, the RPAA, or the Bonds or to enforce the provisions of the Issue
Management and Underwriting Agreement, Trust Agreement, the RPAA or the Bonds in
whole or in part, then the Issuer may redeem the Bonds at any time in whole, but not in part
(having given not more than 60 days nor less than 30 days notice to the Trustee, the
Registrar and the Paying Agent from the time of illegality) at par plus accrued interest.
As used herein, the following events shall be considered as changes in law or circumstances
(Change in Law) as it refers to the obligations of the Issuer and to the rights and interests of
the Bondholders under this Agreement and the Bonds:
(i)

Any government and/or non-government consent, license, authorization,


registration or approval now or hereafter necessary to enable the Issuer to comply
with its obligations under this Agreement or the Bonds shall be modified in a
manner which shall materially and adversely affect the ability of the Issuer to
comply with such obligations, or shall be withdrawn or withheld.

(ii)

Any provision of this Agreement or any of the Transaction Documents is or shall


become, for any reason, invalid, illegal or unenforceable to the extent that it shall
become for any reason unlawful for the Issuer to give effect to its rights or
obligations hereunder, or to enforce any provisions of this Agreement or any of
the Transaction Documents in whole or in part, or any law shall be introduced to
prevent or restrain the performance by the parties hereto of their obligations
under this Agreement or any other Transaction Document.

(iii)

Any concessions, permits, rights, franchise or privileges required for the conduct of
the business and operations of the Issuer shall be revoked, canceled or otherwise
terminated, or the free and continued use and exercise thereof shall be curtailed
or prevented, in such manner as to materially and adversely affect the financial
condition or operations of the Issuer.
Upon the occurrence of any of the events mentioned in Sections 8.3(d)(i),
8.3(d)(ii) or 8.3(d)(iii), the Trustee shall secure from the Registrar an updated list
of Bondholders and provide written notices to all registered Bondholders of the
intended early redemption and the Issuer shall pay all registered Bondholders in
accordance with the Terms and Conditions and this Agreement.

Early Redemption due to Change of Control


Upon the occurrence of a Change of Control, Bondholders holding at least two-thirds (2/3) of
the outstanding principal amount of the Bonds may require the Issuer to repurchase all (but not
some) of the Bonds, at a redemption price equal to the principal amount of the Bonds being
redeemed and accrued interest thereon (the Change of Control Redemption Price). Within
fifteen (15) days following a Change of Control, the Issuer shall notify the Trustee, which shall,
in turn, notify the Bondholders (i) that a Change of Control has occurred and that the
Bondholders holding at least two-thirds (2/3) of the outstanding principal amount of the Bonds
may require the Issuer to repurchase all (but not some) of the Bonds at the Change of Control
Redemption Price, and (ii) the date set by the Issuer for such repurchase (which shall not be
earlier than forty-five (45) days and no later than sixty (60) days from the date notice is
received by the Trustee). The decision of the Bondholders holding at least two-thirds (2/3) of
the outstanding principal amount of the Bonds shall be conclusive and binding upon all the
Bondholders.
Change of Control for purposes of this Section shall mean San Miguel Corporation (and/or its
Affiliates) ceasing to, whether directly or indirectly, have an aggregate economic interest of
more than 50.0% in the Issuer or ceasing to have control over the Issuer. For purposes of
this definition, Affiliate means, with respect to San Miguel Corporation, any person that
directly or indirectly, through one or more intermediaries, controls or is controlled by, or is
under common control with, San Miguel Corporation. In this context, control means the
60

possession, directly or indirectly, of the power to direct, or cause the direction of, the
management and policies of such person, whether through ownership of voting shares, by
contract, or otherwise.
Early Redemption Option
The Issuer may (but shall not be obliged to) redeem all (and not a part only) of any series of the
outstanding Bonds on the following relevant dates (each date, an Early Redemption Option
Date).
The amount payable to the Bondholders in respect of such redemptions shall be calculated
based on the principal amount of the Bonds being redeemed, as the sum of (i) the accrued
interest on the Bonds computed from the last Interest Payment Date up to the relevant Early
Redemption Option Date; and (ii) the product of the principal amount and the applicable Early
Redemption Price in accordance with the following schedule:
Early Redemption Option Date on
Series A Bonds

Early
Redemption
Price

Third (3rd) anniversary from Issue


Date

101.0%

Fourth (4th) anniversary from Issue


Date

100.5%

Early Redemption Option Date on


Series B Bonds

Early
Redemption
Price

Fifth (5th) anniversary from Issue Date

101.0%

Sixth (6th) anniversary from Issue Date

100.5%

Early Redemption Option Date on


Series C Bonds

Early
Redemption
Price

Seventh anniversary (7th) from Issue


Date
Eight (8th) anniversary from Issue
Date
Ninth (9th) anniversary from Issue
Date

102.0%
101.0%
100.5%

The Issuer shall give not more than 60 days or less than 30 days prior written notice of its
intention to redeem the Bonds to the Trustee, which notice shall be irrevocable and binding
upon the Issuer to effect such early redemption of the Bonds at the Optional Redemption Date
stated in such notice.
Purchase and Cancellation
The Issuer may purchase the Bonds at any time in the open market or by tender or by contract,
in accordance with PDEx Rules, without any obligation to make pro rata purchases from all
Bondholders. Bonds so purchased shall be redeemed and cancelled and may not be re-issued.
Upon listing of the Bonds in the PDEx, the Issuer shall disclose any such transaction in
61

accordance with the applicable PDEx disclosure rules.


Payments
The principal of, interest on, and all other amounts payable on the Bonds shall be paid to the
Bondholders through the Paying Agent. The Paying Agent shall credit the proper amounts
received from the Issuer via RTGS, net of final taxes and fees (if any), to the Philippine Peso
cash account maintained and designated by or on behalf of the Bondholder in his/her
Application to Purchase. The principal of, and interest on, the Bonds shall be payable in
Philippine Pesos. The Issuer shall ensure that so long as any of the Bonds remain outstanding,
there shall at all times be a Paying Agent for purpose of disbursing payments on the Bonds.
Taxation
Under the Philippine law prevailing as of the Issue Date, interest income on the Bonds is
subject to a final withholding tax at rates between 20% and 30% depending on the tax status of
the relevant Bondholder under relevant law, regulation, or tax treaty. Except for such final
withholding tax and as otherwise provided below, all payments of principal and interest are to
be made free and clear of any deductions or withholding for or on account of any present or
future taxes or duties imposed by or on behalf of the Republic of the Philippines, including but
not limited to, issue, registration or any similar tax or other taxes and duties, including interest
and penalties, if any. If such taxes or duties are imposed, the same shall be for the account of
the Issuer; provided however that, the Issuer shall not be liable for the following:
(a) Income tax on any gain by a holder of the Bonds realized from the sale, exchange or
retirement of the said Bonds;
(b) The applicable final withholding tax on interest earned on the Bonds prescribed under
the Tax Reform Act of 1997, as amended and its implementing rules and regulations
as may be in effect from time to time. Interest income on the Bonds is subject to a final
withholding tax at rates between 20% and 30%, depending on the tax status of the
relevant Bondholder and subject to its claim of tax exemption or preferential
withholding tax rates under relevant law, regulation or tax treaty;
(c) Gross Receipts Tax under Section 121 of the National Internal Revenue Code (the Tax
Code);
(d) Taxes on the overall income of any securities dealer or Bondholder, whether or not
subject to withholding; and
(e) Value Added Tax (VAT) under Sections 106 to 108 of the Tax Code, and as
amended by Republic Act No. 9337.
Any documentary stamp tax for the primary issue of the Bonds and the execution of the Issue
Management and Underwriting Agreement, Trust Agreement, and the RPAA, if any, shall be
for the account of the Issuer.
FINANCIAL COVENANT
The Issuer may Incur Indebtedness if on the Transaction Date, after giving effect to the
Incurrence of such Indebtedness, but not giving any effect to the receipt or application of
proceeds therefrom, the Leverage Ratio is not more than 5.5x.
In the determination of any particular amount of Indebtedness in connection with Financial
Covenant, Guarantees, Security Interests or obligations with respect to letters of credit
supporting Indebtedness otherwise included in the determination of such particular amount
shall not be included.
NEGATIVE PLEDGE
Until redemption or payment in full of the aggregate outstanding principal amount of the Bonds,
62

the Company will not and will ensure that none of its Material Subsidiaries will, without the prior
written consent of the Majority Bondholders, create or have outstanding any Security Interest
upon or with respect to, any of the present or future business, undertaking, assets or revenues
(including any uncalled capital) of the Company or any of the Material Subsidiaries to secure
any Indebtedness unless the Company, in the case of the creation of the Security Interest,
before or at the same time and, in any other case, promptly, takes any and all action necessary
to ensure that:
i. All amounts payable by it under the Bonds are secured by the Security Interest equally
and ratably with the relevant Indebtedness to the satisfaction of the Majority Bondholders;
or
ii. Such other Security Interest or other arrangement (whether or not it includes the giving of
a Security Interest) is provided to the satisfaction of the Majority Bondholders;
provided, that the foregoing restriction shall not apply to any Permitted Security Interest.
For purposes of the Financial Covenant and Negative Pledge Sections, the following defined
terms shall have the respective meanings set forth below:
Asset Sale means any sale, transfer or other disposition (including by way of merger,
consolidation or sale and leaseback transaction and including any sale or issuance of the
Capital Stock of any of the Material Subsidiaries) in one transaction or a series of related
transactions by the Company or any of the Material Subsidiaries to any person other than the
Company or any of the Material Subsidiaries of:
(a)

any capital stock of a Principal Subsidiary;

(b)

any of its rights under an IPPA Agreement; or

(c)

any of its property or assets excluding proceeds from the issuance of Capital Stock
through an initial public offering or any other public offering or private placement,

and which is not a merger, provided that Asset Sale shall not include the following (the
Permitted Asset Sale):
(i)

sales, transfers or other dispositions of inventory in the ordinary course of business and
the consideration received is at least equal to the Fair Market Value of the assets sold or
disposed of;

(ii)

sales, transfers or other dispositions of assets with a Fair Market Value which, when
aggregated with the Fair Market Value of all other assets which are the subject of any
sale, transfer or other disposition, does not exceed 1,500,000,000 in any transaction or
series of related transactions;

(iii)

any sale, transfer, assignment or other disposition of any inventory or property with a Fair
Market Value not in excess of 50,000,000 to an employee of the Company in any
transaction or series of related transactions under an employee benefit plan approved by
the Board of Directors and in effect from time to time;

(iv)

any sale, transfer, assignment or other disposition of any property or equipment that has
become damaged, worn out, obsolete or otherwise unsuitable for use in connection with
the business of the Company or any of the Material Subsidiaries;

(v)

any sale, transfer or other disposition of assets to the Company or a wholly owned
Material Subsidiary;

63

(vi)

any transfer, assignment or other disposition deemed to occur in connection with creating
or granting any Permitted Security Interest; and

(vii)

any sale transfer or other disposition of any Capital Stock of Strategic Power Devt. Corp.
or any of its assets (including its rights under an IPPA Agreement).

Capital Stock means, with respect to any Person, any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the date of this
Agreement or issued thereafter, including, without limitation, all Common Stock and preferred
stock.
Commodities Agreement means any forward, option or futures contract or other similar
agreement or arrangement designed to protect against fluctuations in the price of fuel or
electricity used by the Company or any of the Material Subsidiaries in its operations.
Common Stock means, with respect to any Person, any and all shares, interests, rights to
purchase, warrants, options or other participations in, and other equivalents (however
designated and whether voting or non-voting) of such Person's common stock or ordinary
shares, whether or not outstanding at the date of this Agreement, and include, without limitation,
all series and classes of such common stock or ordinary shares.
Consolidated EBITDA means, for any period, the consolidated net income of the Company
(excluding items between any or all of the Company and its subsidiaries): (a) before any
provision on account of taxation; (b) before any interest, commission, discounts, other fees or
foreign exchange gains or losses incurred or payable, received or receivable or realized by the
Company or any of its subsidiaries in respect of Indebtedness of the Group; (c) before any item
treated as exceptional or extraordinary items; (d) before any amount attributable to the
amortization of intangible assets and depreciation of tangible assets; (e) excluding income
attributable to or generated by Ring-Fenced Subsidiaries; and (f) after deducting any payments
(including principal and interest) under the IPPA Agreements, and so that no amount shall be
included or excluded more than once and all as determined on a consolidated basis for the
Company and its subsidiaries in conformity with the PFRS.
Consolidated Net Total Debt means at any time the Consolidated Total Debt less the
aggregate amount at that time of all cash and temporary cash investment (on a consolidated
basis) to which the Company or any of its subsidiaries is beneficially entitled at that time and
which is not subject to any security interest.
Consolidated Total Debt means at any time the aggregate amount of all obligations of the
Company and its Subsidiaries for or in respect of Indebtedness but excluding; (a) any such
obligation to the Company and/or any of its Subsidiaries (and so that no amount shall be
included or excluded more than once); (b) the aggregate of the capitalized lease obligations
payable to PSALM under the IPPA Agreements and (c) all Project Debt.
Currency Agreement means any foreign exchange forward contract, currency swap agreement
or other similar agreement or arrangement designed to protect against fluctuations in foreign
exchange rates.
Debt means the sum of interest-bearing debt of the Issuer, as reflected in its financial
statements.
Disqualified Stock means any class or series of Capital Stock of any Person that by its terms
(or by the terms of any security into which it is convertible or for which it is exchangeable) or
otherwise is (a) required to be redeemed prior to the Maturity Date of the Series C Bonds, (b)
redeemable at the option of the holder of such class or series of Capital Stock or any other
person at any time prior to the Maturity Date of the Series C Bonds or (c) convertible into or
exchangeable for Capital Stock referred to in paragraphs (a) or (b) above or Indebtedness
64

having a scheduled maturity prior to the Maturity Date of the Series C Bonds; provided that any
class or series of debt securities or preferred stock convertible or exchangeable into Common
Stock, the terms of which allow for a cash payment in lieu of Common Stock upon conversion or
exchange in the event that the issue or distribution of Common Stock to the holder thereof will
cause such Person to violate foreign ownership regulations applicable in the Philippines from
time to time, shall not constitute Disqualified Stock provided that any such cash payments are
made with the proceeds of the sale of equity interests of such Person to an unaffiliated Person.
Fair Market Value means the price that would be paid in an arm's-length transaction between
an informed and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy, as determined in good faith by the Board of Directors, whose
determination shall be conclusive if evidenced by a board resolution.
Four Quarterly Period means, in respect of any date, the then most recent four quarterly
periods prior to such date for which consolidated financial statements of the Company (which the
Company shall use its best efforts to compile in a timely manner) are available.
Group means, at any time, the Company and its Subsidiaries at such time.
Guarantee means any obligation, contingent or otherwise, of any Person directly or indirectly
guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the
generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue of partnership
arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services,
to take-or-pay, or to maintain financial statement conditions or otherwise) or (b) entered into for
purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of
the payment thereof or to protect such obligee against loss in respect thereof (in whole or in
part). The term Guarantee used as a verb has a corresponding meaning.
Hedging Obligation of any Person means the obligations of such Person pursuant to any
Currency Agreement or Interest Rate Agreement or Commodities Agreement.
Incur means with respect to any Indebtedness or Capital Stock, to incur, create, issue,
assume, guarantee or otherwise become liable for or with respect to, or become responsible
for, the payment of, contingently or otherwise, such Indebtedness or Capital Stock; provided
that (a) any Indebtedness of a Person existing at the time such Person becomes a Subsidiary
of the Issuer will be deemed to be Incurred by such Subsidiary of the Issuer at the time it
becomes a Subsidiary of the Issuer and (b) the accretion of original issue discount shall not be
considered an Incurrence of Indebtedness. The terms Incurrence, Incurred, and Incurring have
meanings correlative with the foregoing.
Indebtedness of any Person means any indebtedness for or in respect of:
(a)

all obligations of such Person for borrowed money;

(b)

all obligations of such Person evidenced by bonds, debentures, notes or other similar
instruments;

(c)

all obligations of such person to pay the deferred purchase price of property or services,
except trade accounts payable arising in the ordinary course of business;

(d)

all obligations of such Person as lessee which are capitalized in accordance with PFRS;

(e)

all Indebtedness of others secured by a Security Interest on any asset of such Person;

(f)

receivables sold or discounted (other than any receivables to the extent they are sold on a
non-recourse basis);
65

(g)

all obligations in respect of any Disqualified Stock, provided that such Disqualified Stock
(i) falls within paragraph (a) of the definition of "Disqualified Stock" or (ii) falls within
paragraph (b) of the definition of "Disqualified Stock" and the Person entitled to exercise
the option to require redemption of such Disqualified Stock has exercised or given notice
to exercise such option or (iii) falls within paragraph (c) of the definition of "Disqualified
Stock" and has been converted into Indebtedness having a scheduled maturity prior to the
Maturity Date of the Series C Bonds;

(h)

all Indebtedness of others Guaranteed by such Person;

(i)

all non-contingent obligations of such Person to reimburse any bank or other Person in
respect of amounts paid under a letter of credit, Guarantee or similar instrument; and

(j)

any interest rate swap, currency swap, forward foreign exchange transaction, cap, floor,
collar or option transaction or any other treasury transaction or any combination thereof or
any other transaction entered into in connection with protection against or benefit from
fluctuation in any rate or price (and the amount of Indebtedness in relation to any such
transaction described in this paragraph (j) shall be calculated by reference to the mark-tomarket valuation of such transaction at the relevant time),

and so that where the amount of Indebtedness falls to be calculated, no amount shall be taken
into account more than once in the same calculation and, where the amount is to be calculated
on a consolidated basis in respect of a corporate group, monies borrowed or raised, or other
indebtedness, as between members of such group shall be excluded.
Interest Rate Agreement means any interest rate protection agreement, interest rate future
agreement, interest rate option agreement, interest rate swap agreement, interest rate cap
agreement, interest rate collar agreement, interest rate hedge agreement, option or future
contract or other similar agreement or arrangement designed to protect against fluctuations in
interest rates.
Investment means:
a)

any direct or indirect advance, loan or other extension of credit to another Person;

b)

any capital contribution to another Person (by means of any transfer of cash or other
property to others or any payment for property or services for the account or use of
others);

c)

any purchase or acquisition of Capital Stock, Indebtedness, bonds, notes, debentures or


other similar instruments or securities issued by another Person; or

d)

any Guarantee of any obligation of another Person.

The acquisition by the Company or a Material Subsidiary of a Person that holds an Investment in
a third Person will be deemed to be an Investment by the Company or such Material Subsidiary
in such third Person.
Leverage Ratio means, on any Transaction Date, the ratio of (x) Consolidated Net Total Debt
at such Transaction Date to (y) Consolidated EBITDA for the then most recent Four Quarterly
Period prior to such Transaction Date; provided, however, that if, as of such date of
determination:
(a)

the Issuer or any of its Subsidiaries has Incurred any Indebtedness since the beginning
of the Four Quarterly Period that remains outstanding, Consolidated EBITDA and
Consolidated Net Total Debt for such period shall be calculated after giving effect on a
pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the
first day of the Four Quarterly Period;
66

(b)

the Issuer or any of its Subsidiaries has repaid, repurchased, defeased or otherwise
discharged any Indebtedness or amount payable under an IPPA Agreement prior to its
due date since the beginning of the Four Quarterly Period (in each case other than
Indebtedness Incurred under any revolving credit facility unless such Indebtedness has
been permanently repaid and has not been replaced), Consolidated EBITDA and
Consolidated Net Total Debt for the Four Quarterly Period shall be calculated on a pro
forma basis as if such discharge had occurred on the first day of the Four Quarterly
Period;

(c)

since the beginning of the Four Quarterly Period, the Issuer or any of its Subsidiaries has
made an Asset Sale (including an Asset Sale of any Capital Stock of a Principal
Subsidiary), Consolidated EBITDA for the Four Quarterly Period shall be reduced by an
amount equal to the Consolidated EBITDA (if positive) directly attributable thereto for the
Four Quarterly Period, or increased by an amount equal to Consolidated EBITDA (if
negative) attributable thereto for the Four Quarterly Period and Consolidated Net Total
Debt for the Four Quarterly Period shall be reduced by an amount equal to the
Consolidated Net Total Debt directly attributable to any Indebtedness of the Issuer or
any of its Subsidiaries repaid, repurchased, defeased or otherwise discharged with
respect to the Issuer and its continuing Subsidiaries in connection with such Asset Sale
for the Four Quarterly Period (or, if the Capital Stock of any Subsidiary of the Issuer is
sold, the Consolidated Net Total Debt for such period directly attributable to the
Indebtedness of such Subsidiary to the extent the Issuer and its continuing Subsidiaries
are no longer liable for such Indebtedness after such sale);

(d)

since the beginning of the Four Quarterly Period, the Issuer or any of its Subsidiaries (by
merger, consolidation or otherwise) has made an Investment in any Person that thereby
becomes a Subsidiary of the Issuer, or otherwise has acquired any company, any
business, or any group of assets or any set of rights constituting or relating to an
operating unit of a business, including any such Investment or acquisition occurring in
connection with a transaction causing a calculation to be made hereunder, Consolidated
EBITDA for the Four Quarterly Period will be calculated after giving pro forma effect
thereto (including the Incurrence of any Indebtedness) as if such Investment or
acquisition occurred on the first day of the Four Quarterly Period; and

(e)

since the beginning of the Four Quarterly Period, any Person (that became a Subsidiary
of the Issuer or was merged or otherwise combined with or into the Issuer or any of its
Subsidiaries since the beginning of the Four Quarterly Period) will have made any Asset
Sale or any Investment or acquisition of assets that would have required an adjustment
pursuant to clause (c) or (d) above if made by the Issuer or any of its Subsidiaries since
the beginning of the Four Quarterly Period, Consolidated EBITDA for the Four Quarterly
Period will be calculated after giving pro forma effect thereto as if such Asset Sale,
Investment or acquisition of assets occurred on the first date of the Four Quarterly
Period. For purposes of this definition, whenever a pro forma effect is to be given to any
transaction or calculation under this definition, the pro forma calculations will be as
determined in good faith by a responsible financial or accounting officer of the Issuer.

Material Subsidiary means at any time:


(a)

any of the Principal Subsidiaries; or

(b)

a Subsidiary of the Company:


(i)

whose net income (consolidated in the case of a Subsidiary which itself has
Subsidiaries) or whose Total Assets (consolidated in the case of a Subsidiary which
itself has Subsidiaries) represent in each case (or, in the case of a Subsidiary
acquired after the end of the financial period to which the then latest audited
consolidated accounts of the Company and its Subsidiaries relate, are equal to) not
less than 25% of the consolidated net income of the Company and its Subsidiaries
taken as a whole, or, as the case may be, 25% of the consolidated Total Assets, of
67

the Company and its Subsidiaries taken as a whole, all as calculated respectively by
reference to the then latest audited accounts (consolidated or, as the case may be,
unconsolidated) of such Subsidiary and the then latest audited consolidated
accounts of the Company and its Subsidiaries, provided that (A) in the case of a
Subsidiary of the Company acquired after the end of the financial period to which the
then latest audited consolidated accounts of the Company and its Subsidiaries
relate, the reference to the then latest audited consolidated accounts of the
Company and its Subsidiaries for the purposes of the calculation above shall, until
consolidated accounts for the financial period in which the acquisition is made have
been prepared and audited as aforesaid, be deemed to be a reference to such firstmentioned accounts as if such Subsidiary had been shown in such accounts by
reference to its then latest relevant audited accounts, adjusted as deemed
appropriate by the Company and (B) if the then latest audited consolidated accounts
of the Company and its Subsidiaries show a net loss for the relevant financial period
then there shall be substituted for the words "net income" the words "gross
revenues" for the purpose of this definition;
(ii)

to which is transferred the whole or substantially the whole of the undertaking and
assets of a Subsidiary of the Company which immediately prior to such transfer is a
Material Subsidiary of the Company, provided that the transferor Subsidiary shall
upon such transfer forthwith cease to be a Material Subsidiary of the Company and
the transferee Subsidiary shall cease to be a Material Subsidiary of the Company
pursuant to this sub-paragraph on the date on which the consolidated accounts of
the Company and its Subsidiaries for the financial period current at the date of such
transfer have been prepared and audited as aforesaid but so that such transferor
Subsidiary or such transferee Subsidiary may be a Material Subsidiary of the
Company on or at any time after the date on which such consolidated accounts have
been prepared and audited as aforesaid by virtue of the provisions of sub-paragraph
(i) above or, prior to or after such date, by virtue of any other applicable provision of
this definition; or

(iii)

to which is transferred an undertaking or assets which, taken together with the


undertaking or assets of the transferee Subsidiary, generated (or, in the case of the
transferee Subsidiary being acquired after the end of the financial period to which
the then latest audited consolidated accounts of the Company and its Subsidiaries
relate, generate net income equal to) not less than 25% of the consolidated net
income of the Company and its Subsidiaries taken as a whole, or represent (or, in
the case aforesaid, are equal to) not less than 25% of the consolidated Total Assets
of the Company and its Subsidiaries taken as a whole, all as calculated as referred
to in sub-paragraph (i) above, provided that the transferor Subsidiary (if a Material
Subsidiary of the Company) shall upon such transfer forthwith cease to be a Material
Subsidiary of the Company unless immediately following such transfer its
undertaking and assets generate (or, in the case aforesaid, generate net income
equal to) not less than 25% of the consolidated net income of the Company and its
Subsidiaries taken as a whole, or its assets represent (or, in the case aforesaid, are
equal to) not less than 25% of the consolidated Total Assets of the Company and its
Subsidiaries taken as a whole, all as calculated as referred to in sub-paragraph (i)
above, and the transferee Subsidiary shall cease to be a Material Subsidiary of the
Company pursuant to this sub-paragraph on the date on which the consolidated
accounts of the Company and its Subsidiaries for the financial period current at the
date of such transfer have been prepared and audited but so that such transferor
Subsidiary or such transferee Subsidiary may be a Material Subsidiary of the
Company on or at any time after the date on which such consolidated accounts have
been prepared and audited as aforesaid by virtue of the provisions of sub-paragraph
(i) above or, prior to or after such date, by virtue of any other applicable provision of
this definition.

68

Permitted Security Interest means:


(a)

any Security Interest existing as of the date of the Trust Agreement

(b)

any preference or priority granted over the payments under the IPPA Agreements
pursuant to Article 2244(14) of the Civil Code of the Philippines;

(c)

any Security Interest over or affecting any asset of any company which becomes a
member of the Group after the date of this Agreement, where the Security Interest is
created prior to the date on which that company becomes a member of the Group;

(d)

to the extent notified to the Lenders in writing, any Security Interest created by a RingFenced Subsidiary securing Project Debt incurred by that Ring-Fenced Subsidiary;

(e)

to the extent notified to the Lenders in writing, Security Interest created over shares in any
Ring-Fenced Subsidiary securing Project Debt incurred by that Ring-Fenced Subsidiary;
and

(f)

any Security Interest upon, or with respect to, any of the present or future business,
undertaking, assets or revenues (including uncalled capital) of any of the Material
Subsidiaries to secure:
(i)

any Indebtedness which (subject to (ii) of this definition below) is not Public Debt; or

(ii)

any Public Debt (A) which (I) by its terms does not provide that the Company or any
Material Subsidiary is an obligor, (II) by its terms does not provide that a Guarantee
or credit support of any kind is given by the Company or any of the Material
Subsidiaries and (III) does not have the legal effect of providing recourse against any
of the assets of the Company or any of the Material Subsidiaries and (B) no default
with respect to which would permit upon notice, lapse of time or both any holders of
any other Indebtedness of the Company or any of the Material Subsidiaries to
declare a default on such other Indebtedness or cause the payment of such other
Indebtedness to be accelerated or payable prior to its stated maturity,

which, in either case (either alone or when aggregated with all other present or future
business, undertaking, assets or revenues (including uncalled capital) of any of the
Material Subsidiaries upon, or with respect to, which Security Interests are subsisting),
does not exceed 15% of the consolidated Total Assets of the Company and its
Subsidiaries taken as a whole.
(g)

any extension, renewal, supplement, or replacement (or successive extensions, renewals,


supplements, or replacements) in whole or in part of any Security Interest referred to in
paragraphs (a), (b), (d), (e), and (f), or any Indebtedness secured thereby; provided that
such extension, renewal, supplements, or replacement is limited to all or any part of the
same property that secured the Security Interest extended, renewed, supplemented, or
replaced (plus any construction, repair, or improvement on such property) and shall
secure no larger amount of financial Indebtedness than that existing at the time of such
extension, renewal, supplement, or replacement.

(h)

Security Interest created with the prior written consent of the Majority Bondholders

Person means any individual, firm, corporation, partnership, association, joint venture, tribunal,
limited liability company, trust, government or political subdivision or agency or instrumentality
thereof, or any other entity or organization.
Principal Subsidiaries means any of South Premiere Power Corp. and San Miguel Energy
Corporation.
Project Debt means Indebtedness incurred by a Ring-Fenced Subsidiary in relation to project
finance in respect of which there is no recourse to the Company or any other member of the
group, and in respect of which neither the Company nor any other member of the group has
69

any actual or contingent liability of any nature, whether as principal, guarantor, surety or
otherwise, except in respect of any security interest granted by the Company or any member of
the group over its shares in a Ring-Fenced Subsidiary.
Public Debt means any present or future indebtedness (whether being principal, interest or
other amounts) for or in respect of any notes, bonds, debentures, debenture stock, loan stock or
other securities which are for the time being, or capable of being, quoted, listed or ordinarily
dealt in on any stock exchange, over-the-counter or other securities market, and any Guarantee
or indemnity of any such indebtedness.
Ring-Fenced Subsidiary means any entity that satisfies the following conditions:
(a)

such entity is a Subsidiary of the Company but not a (i) Material Subsidiary or (ii) Principal
Subsidiary;

(b)

such entity, to the extent directly owned by the Company or a member of the Group (other
than another Ring-Fenced Subsidiary), is a limited liability company or corporation
organized and existing under the laws of the Philippines;

(c)

the Company has delivered a written notification to the Trustee designating such entity as
a Ring-Fenced Subsidiary;

(d)

no member of the Group (other than that Ring-Fenced Subsidiary) shall be contingently
liable for any Indebtedness of such entity or its Subsidiaries, except in respect of the
granting by a member of the Group of Security Interest over its shares in such entity or
such entity's Subsidiaries; and

(e)

all transactions conducted between any member of the Group and such entity or its
Subsidiaries must be on an arm's length basis and on normal commercial terms,

and each Subsidiary of any such entity shall also be a Ring-Fenced Subsidiary.
Security Interest means any (a) mortgage, charge, pledge, lien or other security interest or
encumbrance or other preferential arrangement of any kind, including, without limitation, any
preference or priority under Article 2244 (14) of the Civil Code of the Philippines, as the same
may be amended from time to time, in each case, to the extent securing payment or
performance of an Indebtedness prior to any general creditor of such person; (b) and the right of
a vendor, less or, or similar party under any conditional sales agreement, capital lease or other
title retention agreement, any other right of or arrangement with any creditor to have its claims
satisfied out of any property or assets, or the proceeds therefrom, prior to any general creditor of
the owner thereof.
Subsidiary means, with respect to any Person, more than 50% of the voting power of the
outstanding voting stock of which is owned or controlled, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person. To be controlled by another means that (i)
the controlling entity (whether, directly or indirectly, and whether by the ownership of share
capital, the possession of voting power, contract or otherwise) has the power to appoint and/or
remove all or the majority of the members of the board of directors or other governing body of
that controlled company or otherwise controls or has a power to control the affairs and policies of
that controlled company and control shall be construed accordingly, and (ii) the controlling entity
identifies said controlled company as a subsidiary in its latest available consolidated financial
statements.
Total Assets means, with respect to any specified Person for any period, the aggregate total
current assets and total non-current assets for such period, on a consolidated basis, determined
in conformity with PFRS; provided that any foreign currency denominated deposits secured for
the purposes of Hedging Obligations shall be excluded in computing Total Assets (without
duplication).
70

Transaction Date means with respect to the Incurrence of any Indebtedness, the date such
Indebtedness is incurred.
PENALTY INTEREST
In case any amount payable by the Issuer under the Bonds, whether for principal, interest, or
otherwise, is not paid on the relevant due date, the Issuer shall, without prejudice to its
obligations to pay the said principal, interest and other amounts, pay a penalty fee on the
defaulted amount(s) at the rate of twelve percent (12%) per annum (the Penalty Interest) from
the time the amount fell due until it is fully paid.
GOVERNING LAW
The Bonds and the Trust Agreement are governed by and are construed in accordance with
Philippine law. Any dispute arising out of or relating to the Terms and Conditions shall be
brought before the proper courts of Mandaluyong City or Makati City, to the exclusion of all
other courts and venues of equal and competent jurisdiction.
DEFAULT
Events of Default
The Issuer shall be considered in default under the Bonds and the Trust Agreement in case any
of the following events (each an Event of Default) shall occur and is continuing:
(a)

the Issuer defaults in the payment when due of any amount payable under this Agreement,
the Bonds, or any other Transaction Document unless such failure arises solely as a result
of an administrative or technical error or a Disruption Event and payment is made within
three (3) Business Days after the date such payment is due. For purposes of this section,
Disruption Event means either or both of: (i) a material disruption to those payment
communications systems or to those financial markets which are, in each case, required to
operate in order for payments to be made in connection with the transactions contemplated
by this Agreement to be carried out which disruption is not caused by, and is beyond the
control of, any of the parties; or (ii) the occurrence of any other event which results in a
disruption (of a technical or systems-related nature) to the treasury or payments operations
of a party preventing that, or any other party from: (1) performing its payment obligations
under this Agreement; or (2) communicating with other parties in accordance with the
terms of this Agreement;

(b)

the Issuer fails to perform, comply with, or violates any material provision, term, condition,
covenant or obligation contained in the Transaction Documents (other than by reason of
paragraph (a) above), and any such failure, non-compliance or violation is not remediable
or, if remediable, continues unremedied for a period of 30 days (or such longer curing
period granted to the Issuer by the Majority Bondholders) from the date after written notice
thereof shall have been given to the Issuer by the Trustee;

(c)

any representation or warranty which is made or deemed to be made by the Issuer or any
of the Issuers directors or officers herein or otherwise in connection herewith, or in any
certificate delivered by the Issuer hereunder or in connection herewith, shall prove to have
been untrue or incorrect in any material respect as of the time it was made or deemed to
have been made;

(d)

the Company or any of its Subsidiaries defaults in the performance or observance of, or
compliance with, any one or more of its obligations under a Material Agreement and such
default shall not have been remedied as provided therein and such event might reasonably
be expected to have a Material Adverse Effect;

(e)

a Material Agreement is terminated, repudiated, cancelled or revoked and such event


might reasonably be expected to have a Material Adverse Effect;
71

(f)

a Material Agreement or any provision thereof is or becomes invalid, illegal or


unenforceable and there is a Material Adverse Effect as a result thereof which has not
been remedied within thirty (30) days of the occurrence thereof;

(g)

any Indebtedness of the Issuer, whether singly or in the aggregate, in excess of One Billion
Two Hundred Fifty Million Pesos (1,250,000,000.00) or its equivalent in other currencies
is not paid on its due date or within any applicable grace period or is declared to be due
and payable prior to its stated date of payment (except where liability for payment of that
Indebtedness is being contested in good faith by appropriate means);

(h)

any act, deed or judicial or administrative proceedings in the nature of an expropriation,


sequestration, confiscation, nationalization, intervention, acquisition, seizure, or
condemnation of, or with respect to, the business and operations of the Issuer or its
property or assets, shall be undertaken or instituted by any Governmental Authority,
present or future, unless such act, deed or proceedings are otherwise contested in good
faith by the Issuer or will not have a Material Adverse Effect;

(i)

a decree or order by a court or other Governmental Authority having jurisdiction over the
premises is entered without the consent or application of the Issuer:
(1)

adjudging the Issuer bankrupt or insolvent;

(2)

approving a petition seeking a suspension of payments by or a reorganization of the


Issuer under any applicable bankruptcy, insolvency or reorganization law;

(3)

appointing a receiver, liquidator or trustee or assignee in bankruptcy or insolvency of


the Issuer or of all or substantially all of the business or assets of the Issuer;

(4)

providing for the winding up or liquidation of the affairs of the Issuer;

(5)

with a view to the rehabilitation, administration, liquidation, winding-up or dissolution


of the Issuer; or

(6)

taking other action under Applicable Law which is similar to any of the events
mentioned in paragraphs (1) to (5) above (inclusive);

Provided, that the issuance of any such decree or order shall not be an Event of Default if
the same shall have been dismissed or stayed by injunction or otherwise within ninety (90)
days from issuance thereof;
(j)

the Issuer:
(1)

institutes voluntary proceedings to be adjudicated bankrupt or insolvent or consents


to the filing of a bankruptcy or insolvency proceeding against it;

(2)

files a petition seeking a suspension of payments by it or its reorganization under any


applicable bankruptcy, insolvency or reorganization law or consents to the filing of
any such petition;

(3)

seeks or consents to the appointment of a receiver or liquidator or trustee or assignee


in bankruptcy or insolvency of it or of all or substantially all of its business or assets;

(4)

makes an assignment for the benefit of its creditors or admits in writing its inability to
pay its debts generally as they become due;

(5)

files a petition seeking the winding up or liquidation of its affairs or consents to the
filing of any such petition;
72

(6)

takes any other step with a view to its rehabilitation, administration, liquidation,
winding-up or dissolution or a suspension of payments by it; or

(7)

takes other action under Applicable Law which is similar to any of the events
mentioned in paragraphs (1) to (6) above (inclusive);

(k)

final and executory judgment(s) or order(s) are rendered by a court of competent


jurisdiction against the Issuer or its properties or assets for the payment of money which
will have a Material Adverse Effect and such judgment or order shall continue unsatisfied
or undischarged after ninety (90) days;

(l)

it becomes unlawful for the Issuer to perform any of its obligations under the Transaction
Documents;

(m) the Issuer shall suspend or discontinue all or a substantial portion of its business
operations, whether voluntarily or involuntarily for a period of thirty (30) consecutive days
except in cases of strike or lockout when necessary to prevent business losses, or when
due to fortuitous events or force majeure, provided that in any such event of strikes,
lockouts or closure due to force majeure events, there is no Material Adverse Effect;
(n)

any event or circumstance that will have a Material Adverse Effect has occurred; and

(o)

any Governmental Approval now or hereafter necessary to enable the Issuer to comply
with its obligations under any Material Agreement to which it is party is not issued when
required or is revoked, cancelled, withdrawn or withheld, not renewed, modified or
amended or otherwise ceases to remain in full force and effect and such cancellation,
withdrawal withholding, non-renewal, modification or amendment has a Material Adverse
Effect; provided, that if the same is capable of being remedied, it shall not be an Event of
Default if remedied within ninety (90) days from occurrence thereof.

Wherein:
Applicable Law means any statute, law, regulation, ordinance, rule, judgment, order, decree,
directive, guideline, policy, requirements or other governmental restriction or any similar form of
decision of, or determination by, or any interpretation or administration of any of the foregoing
by, any Governmental Authority.
Governmental Approval means any authorization, consent, concession, grant, approval, right,
franchise, privilege, registration, filing, certificate, license, permit or exemption from, by or with
any Governmental Authority, whether given or withheld by express action or deemed given or
withheld by failure to act within any specified time period.
Governmental Authority means the Philippine government or political subdivision thereof, and
any entity exercising executive, legislative, judicial, regulatory or administrative functions of or
pertaining to the Philippine government.
Majority Bondholders means, (a) with respect to matters relating only to the Series A Bonds,
Bondholders representing more than fifty percent (50%) of the outstanding principal amount of
the Series A Bonds, (b) with respect to matters relating only to the Series B Bonds, Bondholders
representing more than fifty percent (50%) of the outstanding principal amount of the Series B
Bonds, (c) with respect to matters relating only to the Series C Bonds, Bondholders representing
more than fifty percent (50%) of the outstanding principal amount of the Series C Bonds, and (d)
with respect to matters affecting all Bonds, Bondholders representing more than fifty percent
(50%) of the outstanding principal amount of the Bonds.
Material Adverse Effect means, in the reasonable opinion of the Majority Bondholders, acting in
good faith and in consultation with the Issuer, a material adverse effect on (a) the ability of the
Issuer to observe and comply with the provisions of and perform its financial obligations under
73

the Bonds and the Transaction Documents; or (b) the validity or enforceability of the Bonds or
any Transaction Document; or (c) the financial condition, business or operations of the Issuer
taken as a whole.
Material Agreements means each of the IPPA Agreements, as may be amended or
supplemented from time to time.
Application of Payments
Subject to the provisions of the Trust Agreement or the RPAA, any money collected by the
Trustee from the Issuer upon a declaration of default and any other funds held by it shall be
applied by the Trustee in the order of preference as follows:
(a)

To the pro-rata payment to the Trustee, the Registrar and the Paying Agent of the
reasonable and documented costs, expenses, fees, and other charges of collection,
including reasonable compensation to them, their agents, attorneys, and all reasonable
and documented expenses and liabilities incurred or disbursements made by them,
without gross negligence or bad faith in carrying out their respective obligations under
their respective agreements with the Issuer in connection with the Bonds.

(b)

To the payment of all outstanding interest, including any Penalty Interest, in the order of
maturity of such interest.

(c)

To the payment of the principal amount of the Bonds then due and payable.

(d)

The remainder, if any, shall be paid to the Issuer, its successors, or assigns, or to whoever
may be lawfully entitled to receive the same, or as a court of competent jurisdiction may
direct.

Prescription
Claims in respect of principal and interest or other sums payable under the Bonds will prescribe
unless made within ten (10) years (in the case of principal or other sums) or five (5) years (in the
case of interest) from the date on which the payment becomes due.
Remedies
All remedies conferred by the Trust Agreement upon the Trustee and the Bondholders shall be
cumulative and not exclusive and shall not be so construed as to deprive the Bondholders of any
legal remedy by judicial or extra judicial proceedings appropriate to enforce the conditions and
covenants under the Trust Agreement.
No delay or omission by the Trustee or any Bondholder, to exercise any right or power arising
from or on account of any default shall impair any such right or power, or shall be construed to
be a waiver of any such default or an acquiescence thereto; and every power and remedy
provided under the Trust Agreement to the Trustee and Bondholders may be exercised from
time to time and as often as may be necessary or expedient.
Waiver
The Majority Bondholders may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power conferred upon the
Trustee, or the Majority Bondholders may decide for and in behalf of the Bondholders, upon the
written request of the Issuer, to waive the application of the Events of Default and its
consequences except for Events of Default (a), (h), (j), (k), (and (m) cannot be waived by the
Bondholders. No such waiver shall extend to any subsequent or other default or impair any right
consequent thereto. Any such waiver by the Majority Bondholders shall be conclusive and
binding upon all the Bondholders and upon all future holders and owners thereof.
74

Ability to File Suit


No Bondholder shall have any right by virtue or by availing of any provision of the Trust
Agreement to institute any suit, action or proceeding for the collection of any sum due from the
Issuer on account of principal or interest, or for the appointment of a receiver or Trustee, or for
any other remedy hereunder, unless (i) such holder shall previously have given to the Trustee a
written notice of default and of the continuance thereof and the related request for the Trustee to
convene a meeting of the Bondholders to take up matters related to their rights and interests
under the Bonds, and (ii) the Majority Bondholders shall have decided and made a written
request upon the Trustee to institute such suit, action or proceeding in its own name, and (iii) the
Trustee for 60 days after receipt of such notice and request shall have neglected or refused to
institute any such suit, action or proceeding, and (iv) no directions inconsistent with such written
request or rescission and annulment of a declaration of default by the Bondholders has been
made.
No Bondholder shall have any right in any manner whatsoever by virtue of or by availing of any
provision of the Trust Agreement to affect, disturb or prejudice the rights of the holders of any
other such Bonds or to obtain or seek to obtain priority over or preference to any other such
holder or to enforce any right under the Trust Agreement, except in the manner provided under
the Trust Agreement and for the equal, ratable and common benefit of all Bondholders.
TRUSTEE
Appointment of Trustee
The Issuer has appointed Philippine National Bank Trust Banking Group as Trustee for and on
behalf and benefit of the Bondholders, in connection with the distribution and sale by the Issuer
of the Bonds.
Duties and Responsibilities of the Trustee
The Trustee shall be responsible for performing, among others, the following duties for the
benefit of the Bondholders, including but not limited to:
(a)

Monitor compliance by the Issuer with its obligations under the Trust Agreement;

(b)

Report regularly to Bondholders any non-compliance by the Issuer with the Trust
Agreement and any developments with respect to the Issuer that adversely affect the
interest of the Bondholders and advise the Bondholders of the course of action that they
may take to protect their interest; and

(c)

Act on behalf of the Bondholders including calling for and/or attending meetings of the
Bondholders.

Notices to Trustee
All documents required to be submitted to the Trustee and all other notices, requests and other
communications must be in writing and will be deemed to have been duly given only if delivered
personally, by facsimile transmission, or mailed (first class postage prepaid) or emailed to the
parties at the following addresses, facsimile numbers or email addresses; and addressed to the
individuals named below:
PHILIPPINE NATIONAL BANK TRUST BANKING GROUP
3/F PNB Financial Center, President Diosdado Macapagal Blvd. 1300 Pasay City,
Metro Manila, Philippines
Attention: Mr. Jaycee B. Rivera
Telephone: (632) 573 4655/4665/4575
Email: riverajb@pnb.com.ph/ jolejoleje@pnb.com.ph / evangelistraahr@pnb.com.ph
75

All such notices, requests and other communications will: (i) if delivered personally to the
address as provided above, be deemed given upon delivery; (ii) if delivered by facsimile
transmission to the facsimile number as provided above, be deemed given upon receipt; and (iii)
if delivered by mail or email in the manner described above to the address as provided above,
be deemed given upon receipt and in case of email if received in readable form (in each case
regardless of whether such notice, request or other communication is received by any other
person on behalf of such individual to whom a copy of such notice, request or other
communication is to be delivered). The Trustee may from time to time change its address,
facsimile number or other information for the purpose of notices hereunder by giving notice
specifying such change.
Resignation and Change of Trustee
The Trustee may resign at any time by giving the Issuer at least 90 calendar days prior written
notice to that effect. Upon receipt of such notice of resignation, the Issuer shall immediately
appoint a replacement trustee (the Replacement Trustee) by written instrument in duplicate,
one copy of which instrument shall be delivered to the resigning Trustee and one copy to the
Replacement Trustee. If no Replacement Trustee shall have been so appointed and have
accepted appointment within 30 days after the giving of such notice of resignation, the resigning
Trustee or any Bondholder who has been a bona fide holder for at least six (6) months may
petition any court of competent jurisdiction for the appointment of a Replacement Trustee. Such
court may thereupon after such notice, if any, as it may deem proper and prescribe, appoint a
Replacement Trustee.
The Issuer may, subject to the occurrence of certain events as specified in the Trust Agreement,
within 30 days, remove the Trustee and appoint a Replacement Trustee, by written instrument in
duplicate, one copy of which instrument shall be delivered to the Trustee so removed and one
copy to the Replacement Trustee. If the Issuer fails to remove the Trustee and appoint a
Replacement Trustee, any Bondholder may, on behalf of himself and all other Bondholders,
petition any court of competent jurisdiction for the removal of the Trustee and the appointment of
a Replacement Trustee. Such court may thereupon after such notice, if any, as it may deem
proper and prescribe, remove the Trustee and appoint a Replacement Trustee.
The Majority Bondholders may at any time remove for cause the Trustee and with the consent of
the Issuer, appoint a Replacement Trustee in accordance with the terms of the Trust Agreement,
without prejudice to whatever remedies may be available to the Majority Bondholders under the
law or in equity.
Any resignation or removal of the Trustee and the appointment of a Replacement Trustee
pursuant to any of the provisions of the Trust Agreement shall become effective upon the
earlier of: (i) acceptance of appointment by the Replacement Trustee as provided in the Trust
Agreement; or (ii) the effectivity of the resignation notice sent by the Trustee under the Trust
Agreement (the Resignation Effective Date) provided, however, that after the Resignation
Effective Date and, as relevant, until such Replacement Trustee is qualified and appointed, the
resigning Trustee shall discharge duties and responsibilities solely as a custodian of records
for turnover to the Replacement Trustee promptly upon the appointment thereof by SMC
Global Power.
Within ten (10) days from the effectiveness of the resignation or removal of the outgoing trustee
and the appointment of the Replacement Trustee, the outgoing trustee shall transfer and turn
over to the Replacement Trustee, and shall make an accounting of, all the assets, documents or
instruments which are in the custody of the outgoing trustee pursuant to the Trust Agreement, if
any.
Replacement Trustee
The Replacement Trustee shall execute, acknowledge and deliver to the Issuer and to the
outgoing Trustee an instrument accepting his/her appointment, and thereupon the resignation or
removal of the outgoing Trustee shall become effective and the Replacement Trustee, without
76

any further act, deed or conveyance, shall become vested with all the rights, powers, trusts,
duties and obligations of its predecessor under the Trust Agreement. The foregoing
notwithstanding, on the written request of the Issuer or of the Replacement Trustee, the Trustee
ceasing to act as such shall execute and deliver an instrument transferring to the Replacement
Trustee, all the rights, powers and duties of the Trustee so ceasing to act as such. Upon request
of any such Replacement Trustee, the Issuer shall execute any and all instruments in writing as
may be necessary to fully vest in and confer to such Replacement Trustee all such rights,
powers and duties.
Upon acceptance of appointment by the Replacement Trustee, the Issuer shall notify the
Bondholders in writing and/or by publication in a newspaper of general circulation in Metro
Manila, Philippines of the succession of such Replacement Trustee to the duties of the outgoing
Trustee. If the Issuer fails to notify the Bondholders within ten (10) days after acceptance of
appointment by the Replacement Trustee, the latter shall cause the Bondholders to be so
notified at the expense of the Issuer.
MEETING OF BONDHOLDERS
The Trustee may at any time call a meeting of the Bondholders, on its own accord or upon the
written request of the Issuer or the Majority Bondholders, for purposes of taking any actions
authorized under the Trust Agreement.
Notice of Meetings
Notice of every meeting of the Bondholders, setting forth the time and the place of such meeting
and the purpose of such meeting in reasonable detail, shall be sent by the Trustee to the Issuer
and to each of the registered Bondholders not earlier than 45 days nor later than 15 days prior to
the date fixed for the meeting. Each of such notices shall be published in a newspaper of general
circulation as provided in the Trust Agreement. All reasonable and documented costs and
expenses incurred by the Trustee for the proper dissemination of the requested meeting shall be
reimbursed by the Issuer within ten (10) days from receipt of the duly supported billing
statement.
Failure to Call a Meeting
The failure of the Trustee to call a meeting upon the written request of either the Issuer or the
Majority Bondholders within three (3) days from such request shall entitle the requesting party to
send the appropriate notice of Bondholders meeting and the costs therefrom shall be charged to
the account of the Trustee.
Quorum for Meetings
The Trustee shall determine and record the presence of the Majority Bondholders, personally or
by proxy. The presence of the Majority Bondholders shall be necessary to constitute a quorum to
do business at any meeting of the Bondholders.
Procedure for Meetings
The Trustee shall preside at all the meetings of the Bondholders, unless the meeting shall have
been called by the Issuer or by the Bondholders, in which case the Issuer or the Bondholders
calling the meeting, as the case may be, shall move for the election of the chairman and
secretary of the meeting.
Any meeting of the Bondholders may be adjourned from time to time for a period not to exceed
in the aggregate one (1) year from the date for which the meeting shall have been originally
called, and the meeting as so adjourned may be held without further notice. Any such
adjournment may be ordered by persons representing a majority of the aggregate principal
amount of the Bonds represented at the meeting and entitled to vote, whether or not a quorum
shall be present at the meeting.
77

Voting Rights
To be entitled to vote at any meeting of the Bondholders, a person should be a registered holder
of the Bonds as reflected in the Register of Bondholders or a person appointed by a public
instrument in writing as proxy or agent by any such Bondholder (and, in case of corporate or
institutional Bondholders, duly supported by the resolutions of its board of directors or equivalent
body authorizing the appointment of the proxy or agent duly certified by its corporate secretary or
an authorized officer) as of the date of the meeting. For avoidance of doubt, 5,000.00 is equal
to one vote.
Voting Requirements
All matters presented for resolution by the Bondholders in a meeting duly called for the purpose
shall be decided or approved by the affirmative vote of the Majority Bondholders present or
represented in a meeting at which there is a quorum, except as otherwise provided in the Trust
Agreement. Any resolution of the Bondholders which has been duly approved with the required
number of votes of the Bondholders shall be binding upon all the Bondholders and the Trustee.
Action of the Bondholders
In cases where, pursuant to the Trust Agreement, the holders of a specified percentage of the
aggregate outstanding principal amount of Bonds are allowed to take any action (including the
making of any demand or request, the giving of any notice or consent, or the taking of any other
action), the fact that at the time of taking any such action the Bondholders of such specified
percentage have joined such action may be evidenced by: (i) any instrument executed by the
Bondholders in person or by the agent or proxy appointed in writing; (ii) the duly authenticated
record of voting in favor thereof at the meeting of the Bondholders duly called and held in
accordance with the Trust Agreement; or (iii) a combination of such instruments and any such
record of meeting of the Bondholders.
Non-Reliance
Each Bondholder represents and warrants to the Trustee and to the Issuer that it has
independently and, without reliance on the Trustee or the Issuer, made its own credit
investigation and appraisal of the financial position and affairs of the Issuer on the basis of such
documents and information it has deemed appropriate and that it has subscribed to the Bonds
on the basis of such independent appraisal, and that it shall continue to make its own credit
appraisal without reliance on the Trustee or the Issuer.
Notices to Bondholders

Except where a specific mode of notification is provided for in the


Issue Management and Underwriting Agreement, Trust Agreement, or
the RPAA, notices to Bondholders shall be sufficient when made in
writing and transmitted in any one of the following modes: (i)
registered mail; (ii) ordinary mail; (iii) by publication for at least once a
week for two (2) consecutive weeks in at least two (2) newspapers of
general circulation in the Philippines; or (iv) personal delivery to the
address of record in the Register of Bondholders. If notices to
Bondholders shall be sent by mail or personal delivery, such notices
shall be sent to the mailing address of the Bondholders as set forth in
the Register of Bondholders All notices shall be deemed to have been
received: (i) ten (10) days from posting, if transmitted by registered
mail; (ii) 15 days from mailing, if transmitted by ordinary mail; (iii) on
date of last publication, if notice is made through publication; or (iv)
78

on date of delivery, for personal delivery.INTERESTS OF NAMED


EXPERTS
LEGAL MATTERS
All legal issues relating to the issuance of the Bonds which are subject of this Offer shall be
passed upon by SyCip Salazar Hernandez & Gatmaitan for the Joint Issue Managers, Joint Lead
Underwriters and Bookrunners, and Picazo Buyco Tan Fider & Santos for the Company. SyCip
Salazar Hernandez & Gatmaitan and Picazo Buyco Tan Fider & Santos have no direct or indirect
interest in SMC Global Power. SyCip Salazar Hernandez & Gatmaitan and Picazo Buyco Tan
Fider & Santos may, from time to time be engaged by SMC Global Power to advise in the
transactions of the Company and perform legal services on the same basis that SyCip Salazar
Hernandez & Gatmaitan and Picazo Buyco Tan Fider & Santos provide such services to its other
clients.
INDEPENDENT AUDITORS
R.G. Manabat & Co., the independent auditors, audited the financial statements of the Company
as of and for the years ended December 31, 2015, 2014 and 2013, which are all included in this
Prospectus. R.G. Manabat & Co. has no shareholdings in the Company, or any right, whether
legally enforceable or not, to nominate or to subscribe to the securities of the Company, in
accordance with the professional standards on independence set by the Board of Accountancy
and Professional Regulation Commission.
The named independent auditor has not acted and will not act as promoter, underwriter, voting
trustee, officer or employee of the Company.
The aggregate fees billed by R.G. Manabat & Co. amounted to 3,550,000, 4,200,000 and
1,200,000 in 2015, 2014 and 2013, respectively. Said fees include compensation for audit
services and other related services such as review and agreed-upon procedures. There were no
fees paid for accounting, compliance, advisory, planning and any other form of tax. There were
no other fees paid to the independent auditors other than for the above-described services.
SMC Global Power has no disagreements with R.G. Manabat & Co. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or procedure.
The Audit Committee has an existing policy to review and pre-approve audit and non-audit
services rendered by the independent auditors of the Company. The Audit Committee does not
allow SMC Global Power to engage independent auditors for certain non-audit services
expressly prohibited by SEC regulations to be performed by an independent auditor for its audit
clients. This is to ensure that such independent auditors maintain the highest level of
independence from the SMC Global Power, both in fact and appearance.

79

DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
SMC Global Power is a holding company which owns subsidiaries that are primarily
engaged in the generation, supply and sale of electric power in the Philippines. SMC Global
Power, together with its subsidiaries, is one of the largest power companies in the Philippines,
controlling 2,903 MW of combined capacity as of December 31, 2015 and which benefits from
diversified fuel sources, including natural gas, coal and hydroelectric. Based on the installed
generating capacities in ERC Resolution No. 03, Series of 2015, SMC Global Power, through
its IPPA and IPP subsidiaries, had a 17% market share of the power supply of the national
grid, and a 22% market share of the Luzon grid, in each case as of December 31, 20153. SMC
Global Power entered the power industry in 2009 following the acquisition of IPPA rights in
privatization auctions conducted by the Government. Under the IPPA business model, SMC
Global Power, through its subsidiaries SMEC, SPDC and SPPC, gained the right to sell
electricity generated by the power plants owned and operated by the IPPs without having to
bear any of the large upfront capital expenditures for power plant construction or maintenance.
As an IPPA, each of SMEC, SPDC and SPPC also has the ability to manage both market and
price risk by entering into bilateral contracts with offtakers while capturing potential upside from
the sale of excess capacity through the WESM.
SMC Global Power, through SMEC, SPDC and SPPC, controls the 2,545 MW combined
contracted capacity of the Sual, San Roque, and Ilijan Power Plants through the IPPA
Agreements of its subsidiaries, SMEC, SPDC and SPPC, respectively. SMEC acquired the IPPA
rights for the Sual Power Plant in November 2009, SPDC for the San Roque Power Plant in
January 2010 and SPPC for the Ilijan Power Plant in June 2010. The Sual Power Plant is a coalfired thermal power plant, the San Roque Power Plant is a hydro-electric power plant, and the
Ilijan Power Plant is a natural gas-fired combined cycle power plant.
In September 2013, SMC Global Power, through SPI, acquired 100% of the 140 MW Limay
Cogeneration Plant from Petron Corporation. In November 2014, SMC Global Power, through its
subsidiary PVEI, acquired a 60% stake in AHC, the owner and operator of the 218 MW AHEPP.
As at December 31, 2015, the total capacity of SMC Global Power is 2,903 MW including the
entire capacity of the AHEPP.
SMC Global Power, through SMEC, SPDC, SPPC, AHC and SPI, sells power through offtake
agreements directly to customers, including Meralco and other distribution utilities, electric
cooperatives and industrial customers, or through the WESM. The majority of the consolidated
sales of SMC Global Power are through long-term Take-or-pay offtake contracts which
have provisions for passing on fuel costs and certain other fixed costs.
In April 2013, SMC Global Power, through SMC Power Generation Corp., acquired a 35%
equity stake in OEDC. In October 2013, SMC Global Power entered into a 25-year concession
agreement with ALECO. It became effective upon the confirmation of the NEA in November
2013. SMC Global Power organized and established a fully-owned and controlled subsidiary
APEC which assumed, as the concessionaire, all the rights and interests and performs the
obligations of SMC Global Power under the concession agreement with ALECO.
During the years ended December 31, 2013, 2014 and 2015, respectively, SMC Global Power,
through its subsidiaries, sold 13,316 GWh, 14,891 GWh, and 14,714 GWh of power pursuant to
offtake agreements and 2,847 GWh, 2,110 GWh, and 1,844 GWh of power through the
WESM. In contrast, during the years ended December 31, 2013, 2014 and 2015, respectively,
SMC Global Power, through its subsidiaries, purchased 517 GWh, 477 GWh, and 690 GWh of
power from the WESM.

Market share is computed by dividing the total capacity of the Company (2,903,000 KW) with the installed generating
capacity of Luzon grid or National grid (13,057,758 KW and 17,585,167 KW, respectively) from ERC Resolution No. 3
Series of 2015.
80

For the year ended December 31, 2015, the total consolidated revenue, net income and
EBITDA of SMC Global Power were 77.5 billion, 1.8 billion and 5.5 billion, respectively,
while as of December 31, 2015, SMC Global Power had total consolidated assets of 331.2
billion.
The experience of SMC Global Power, through its subsidiaries, in acting as an IPPA and its
ownership of the Limay Cogeneration Plant and the AHEPP, have enabled SMC Global Power
to gain expertise in the Philippine power generation industry. With this experience, SMC Global
Power believes it has a strong platform to participate in the expected future growth of the
Philippine power market, through both the development of greenfield power projects and the
acquisition of existing power generation capacity. SMC Global Power, as the project sponsor,
initiated two greenfield power projects in July 2013 and October 2013 with the construction of the
Davao Greenfield Power Plant and the Limay Greenfield Power Plant, respectively. SMC Global
Power is considering the further expansion of its power portfolio of additional capacity
nationwide through greenfield power projects over the next few years, depending on market
demand.
With the increased development of greenfield power projects from 2016 onwards, an increasing
portion of the portfolio of SMC Global Power is expected from Company-owned and -operated
IPPs. In order to continue its strategic acquisitions of existing power generation capacity, SMC
Global Power intends to participate in the bidding of selected NPC-owned power generation
plants that are scheduled for privatization as asset sales or under the IPPA framework. SMC
Global Power also intends to pursue vertical integration of its power business by expanding into
businesses along the power sector value chain that complement its current power generation
operations. Such vertical integration would encompass both upstream vertical integration
(integration of power generation with fuel suppliers) and downstream vertical integration
(integration of power generation with distribution and supply operations). SMC Global Power
also intends to pursue downstream vertical integration by capitalizing on changes in the
Philippine regulatory structure to expand its sales of power to a broader range of customers,
including retail customers. In August 2011, as part of the reorganization of the power-related
assets of San Miguel Corporation, SMC Global Power acquired from San Miguel Corporation a
100% equity interest in SMELC, which holds an RES license from the ERC. With open access
and retail competition already implemented, the RES license will allow SMC Global Power,
through SMELC, to enter into RSCs with Contestable Customers. SMC Global Power, through
SMEC and its subsidiaries, Bonanza Energy, Daguma Agro and Sultan Energy, also owns coal
exploration, production and development rights over approximately 17,000 hectares of land in
Mindanao. SMC Global Power expects that these assets will potentially serve as a source of
coal fuel supply for its planned and contemplated greenfield power projects.
SMC Global Power is a wholly-owned subsidiary of San Miguel Corporation and is the holding
company for the power businesses of San Miguel Corporation. San Miguel Corporation is a
diversified conglomerate founded in 1890 that is listed on the PSE and has interests in the food,
beverage, packaging, fuel and oil, infrastructure, banking and property businesses. The
relationship of SMC Global Power with San Miguel Corporation allows it to draw on the
extensive business networks, local business knowledge, relationships and expertise of senior
key executive officers of San Miguel Corporation.
STRENGTHS OF THE COMPANY
Leading power company in the Philippines with a strong growth platform. SMC Global
Power and its subsidiaries form one of the largest power companies in the Philippines based
on its combined capacity of 2,903 MW. The subsidiaries of SMC Global Power, namely
SMEC, SPDC and SPPC, are the IPPAs for the Sual, San Roque and Ilijan Power Plants,
respectively, which have a combined contracted capacity attributable to SMC Global Power of
2,545 MW. SMC Global Power also owns the 140 MW Limay Cogeneration Plant in Limay,
Bataan and a 60% stake in AHC, the owner and operator of the 218 MW AHEPP. Based on the
total installed capacity of the market, SMC Global Power, through its subsidiaries, on a
contracted capacity basis for the Sual, San Roque and Ilijan Power Plants and with the full
capacity of the Limay Cogeneration Plant and the AHEPP, has a 17% market share of the power
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supply of the national grid of the Philippines, and a 22% market share of the Luzon grid, in each
case as of December 31, 2015, based on ERC Resolution No. 03, Series of 2015.
The IPPA business model provides SMC Global Power, through the IPPA subsidiaries, with the
benefit of having the right to sell electricity generated by the IPPs without having to incur large
upfront capital expenditures for the power plant construction, or to bear any related development
risk or ongoing maintenance capital expenditures. The IPPA subsidiaries of SMC Global Power
manage the amount of power to be produced by the IPP for supply to the customers of the IPPA
and sell the power generated by the IPPs either pursuant to offtake agreements directly with
customers or through the WESM. This business model provides SMC Global Power the ability to
manage both market and price risk by entering directly into bilateral contracts with established
customers while capturing potential upside through the sale of excess capacity through the
WESM when spot market prices are attractive.
The experience of SMC Global Power, through its subsidiaries, in acting as IPPA and its history
of power plant ownership and operation, has enabled SMC Global Power to gain significant
expertise in the Philippine power generation industry. With this experience, SMC Global Power
believes it is in a strong position to participate in the expected future growth of the Philippine
power market, through both the development of greenfield power projects and the acquisition of
existing power generation capacity of selected NPC-owned power generation plants that are
scheduled for privatization as asset sales or under the IPPA framework.
In addition, capitalizing on changes in the Philippine regulatory structure, SMC Global Power,
through SMELC, holds an RES license from the ERC allowing it to enter into offtake agreements
with Contestable Customers. SMC Global Power, through SMEC and its subsidiaries, also
maintains its coal concession assets which may serve as a back-up fuel source for its greenfield
coal plants.
Stable and predictable cash flows underpinned by long-term offtake agreements.
SMC Global Power, through its subsidiaries, sells power either through offtake agreements
directly to customers, including Meralco and other distribution utilities, electric cooperatives and
industrial customers, or through the WESM. Revenue from bilateral contracts with offtakers
contributed 85%, 89% and 92% of total revenue for the years ended December 31, 2013, 2014
and 2015, respectively. The majority of the combined capacity of SMC Global Power, through
its subsidiaries, has bilateral contracts that cover the term of the IPPA Agreements.
These offtake agreements provide SMC Global Power, through its subsidiaries, with stable and
predictable cash flow, by enabling it to manage both market and price risks. Despite the general
volatility in market prices for electric power due to supply and demand imbalances, SMC Global
Power has been able to manage such risks through the contracted sale prices with offtakers
which also provide a long-term stable source of demand. The tariffs under these agreements take
into account adjustments for fuel, foreign exchange, and inflation, thereby allowing SMC Global
Power to pass through these costs to its offtakers. In addition, SMC Global Powers diversified
portfolio of baseload and peaking power plants helps mitigate market risks through long-term,
inter-company, replacement power contracts.
Flexible and diversified power portfolio. SMC Global Power manages the capacity of a
balanced portfolio of some of the newest and largest power plants in the Philippines, which
benefit from diversified fuel sources. The IPPA Power Plants have an average age of 14 years.
In terms of installed capacity in the Philippines, the Sual Power Plant is the largest coal-fired
power plant, the San Roque Power Plant is one of the largest and newest hydro-electric power
plants, and the Ilijan Power Plant is the largest natural gas-fired power plant.
The existing power portfolio of SMC Global Power consists of (i) IPPAs, covering coal-fired
(Sual Power Plant through SMEC), which represents 34% of the capacity of SMC Global
Power, hydro-powered (San Roque Power Plant through SPDC), which represents 12% of the
capacity of SMC Global Power, and natural gas-fired (Ilijan Power Plant through SPI), which
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represents 41% of the capacity of SMC Global Power, (ii) the Limay Cogeneration Plant through
SPI, which represents 5% of the capacity of SMC Global Power, and (iii) the AHEPP through
AHC which represents 8% of the capacity of SMC Global Power, as of December 31, 2015.
Power generated by the Sual and Ilijan Power Plants is primarily used as baseload supply, and
sold to customers pursuant to offtake agreements. Power generated by the San Roque
Power Plant and the AHEPP is used as peaking supply, and sold through the WESM or as
replacement power to affiliates. Power generated by the Limay Cogeneration Plant is 100%
sold to Petron Corporation.
SMC Global Power believes that the size and diversity of the fuel supply of its power portfolio
reduces the exposure of the Company and its customers to fuel-type specific risks such as
variations in fuel costs, and regulatory concerns that are linked to any one type of power
plant or commodity price. SMC Global Power believes that its management of the capacity
of this diverse portfolio of power plants allows it to respond efficiently to market requirements at
each point of the electricity demand cycle. This diversity helps it to improve the profitability of
its portfolio by flexibly dispatching electricity in response to market demand and fuel cost
competitiveness. SMC Global Power and its subsidiaries can enter into bilateral contracts and
trade in the WESM for the balance of its contracted capacities and energy. By managing the
IPPA Power Plants as a single portfolio and actively managing the energy output of the
plants, SMC Global Power seeks to offer more competitive electricity rates compared to
other power companies with smaller and less diverse portfolios.
Established relationships with world class partners. The IPPA Power Plants are owned,
operated and maintained by world-class partners, including Marubeni Corporation, Tokyo Electric
Power Corporation, Korea Electric Power Corporation (KEPCO) and Mitsubishi Corporation.
Since entering the power business, SMC Global Power has established relationships with
internationally recognized fuel suppliers in Indonesia and Australia, as well as with its customers,
including Meralco, its largest customer. SMC Global Power believes that these well-established
relationships provide a strong foundation for its existing business and a platform of potential
partners for future expansion.
Strong parent company support. The principal shareholder of SMC Global Power, San
Miguel Corporation, is a highly diversified conglomerate with over 125 years of operations in the
Philippines. San Miguel Corporation today has become one of the largest companies listed on
the PSE in terms of revenues and assets. In addition to its power business, San Miguel
Corporation has investments in vital industries that support the economic development of the
country, including the food and beverage, packaging, fuel and oil, infrastructure, banking and
property businesses.
Under the stewardship of San Miguel Corporation, SMC Global Power has become one of the
market leaders in the Philippine power industry in a relatively short period of time. SMC
provides SMC Global Power with key ancillary and support services in areas that promote
operational efficiency, such as human resources, corporate affairs, legal, finance, and treasury
functions. SMC Global Power believes it will continue to benefit from the extensive business
networks of San Miguel Corporation, its in-depth understanding of the Philippine economy
and expertise of its senior managers to identify and capitalize on growth opportunities. Given
the substantial electricity requirements of the other businesses of San Miguel Corporation,
SMC Global Power believes that it can benefit from potential revenue and operational
synergies with the San Miguel Corporation group of companies, and that the San Miguel
Corporation group potentially provides a large captive energy demand base for SMC Global
Power.
Experienced management, operating, trading and marketing teams. The senior
management of SMC Global Power has extensive experience in the Philippine power industry,
and has a deep understanding of the Philippine electricity markets with respect to the
operational, financial, regulatory, and business development aspects of the operation and
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management of power plants. The senior management team of SMC Global Power has
strong professional relationships with key industry participants, such as the DOE, PSALM,
NPC, National Transmission Corporation (TransCo), National Grid Corporation of the
Philippines (NGCP), PEMC and ERC, as well as people from other Government offices and
agencies. The employees of SMC Global Power include experienced energy traders who
pioneered WESM trading and marketing executives who have established strong relationships
with the extensive customer base of NPC. The members of the Executive Committee of SMC
Global Power have on average more than 25 years of experience in executive management
and related Government experience in the power industry, including strengths in key areas of
engineering and finance. The executive and senior management have displayed a strong track
record of growth and delivery since SMC Global Power commenced operations in November
2009.
Well-positioned to capitalize on the anticipated growth of the Philippine electricity
market. Over the period from 2015 to 2020, growth in demand for electricity in the Philippines is
expected to exceed the growth rate of the Philippines gross domestic product (GDP),
according to the DOE. Construction of new power plants on average takes a minimum of three
years. Given the gap between projected electricity demand and committed power projects, SMC
Global Power expects that there will be a power supply shortage in the medium term until new
capacity is built to meet the growing consumption.
SMC Global Power believes it is well-positioned to take advantage of opportunities from
continued growth in the Philippine electricity market, as well as from the existing power supply
shortage. The latter is exacerbated by an existing base of old Government-owned power plants,
which are nearing the end of their useful life, as well as a large base of seasonal power supply
such as the hydropower plants particularly in Mindanao. To meet this need, SMC Global Power
has a defined roadmap to increase capacity by developing greenfield power projects and
bidding for selected NPC-owned power generation plants that are scheduled for privatization.
SMC Global Power, through San Miguel Consolidated Power Corporation, SMC Consolidated
Power Corporation and Limay Premiere Power Corp., is already in the construction stage for
two greenfield power projects with 450 MW of generation capacity expected to be
commissioned in 2016 and another 300 MW in 2017. In addition, as a leading power company
in the Philippines with a large customer base, SMC Global Power believes that it is in a strong
position to leverage its relationships with its existing customers to service their expected
increased electricity demand.
BUSINESS STRATEGIES OF THE COMPANY
Optimize the generation capacity of its power portfolio. SMC Global Power and its
subsidiaries intends to actively manage its sales and optimize the operations of its power plant
portfolio in order to achieve a balanced mix of power sales through (1) contractual
arrangements with electricity customers including distribution utilities, industrial and commercial
customers, and the contestable market, (2) sales through the WESM. This approach provides
SMC Global Power with the certainty and predictability of sales from contracted sales while
being able to capture sales upside from the WESM. The objective of SMC Global Power is to
supply customers based on the least cost while dispatching according to the requirements of
the IPPA Agreements, and to sell available excess energy of the IPPA Power Plants through
the WESM at favorable prices. For the year ended December 31, 2015, sales volumes through
bilateral arrangements compared to sales through the WESM for the Sual, San Roque, and
Ilijan Power Plants were 93% to 7%, 54% to 46%, and 93% to 7%, respectively. For the Limay
Cogeneration Plant, 100% of output is sold to Petron Corporation on a bilateral basis.
Specifically, in case of high prices in the WESM, SMC Global Power can optimize its portfolio
and take advantage of such pricing and sell the excess output of the IPPA Power Plants to the
WESM after delivering the contractual amounts required under its offtake agreements.
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Alternatively, in case of low prices in the WESM, SMC Global Power can minimize the
generation output of its power plants and deliver the contractual amounts required under its
offtake agreements either with output from the San Roque Power Plant or with energy
purchased from the WESM. In the event of tripping or shutdown of either the Sual or Ilijan
Power Plant, SMC Global Power can maximize the dispatch of its remaining units by lowering
the bid prices so that the bilateral contract quantity requirements will be served without buying
at high prices from the WESM.
SMC Global Power also leverages on the diversity of its portfolio to create operational synergies
and improve its supply offers to offtakers. Having a portfolio of baseload, mid-merit, and peaking
power plants utilizing different fuel sources allows the Company to actively respond to the
needs of its offtakers and the market, particularly with regard to replacement power and pricing
competitiveness.
Grow its power portfolio through the development and acquisition of power generation
capacity. SMC Global Power intends to utilize its strong platform, extensive relationships and
experienced management team to address the growing demand for power in the Philippines.
SMC Global Power plans to continue its strategic development of greenfield power projects in
parallel with its plan to acquire existing power generation capacity by bidding for selected NPCowned power generation plants that are scheduled for privatization as asset sales or under the
IPPA framework. SMC Global Power seeks to capitalize on regulatory and infrastructure
developments by scheduling the construction of greenfield power projects to coincide with the
planned improvements in the interconnectivity of the Luzon and Visayas grids, as well as the
eventual interconnectivity and implementation of WESM in Mindanao. In addition, SMC Global
Power seeks to maintain the cost competitiveness of these new projects by strategically
locating them in high-demand areas and in proximity to the grid. SMC Global Power is
considering the further expansion of its power portfolio of new capacity nationwide through
greenfield power projects over the next few years, depending on market demand. SMC Global
Power plans to carry out the expansion of its power portfolio in phases across Luzon, Visayas
and Mindanao. SMC Global Power plans to use clean coal technology for its planned and
contemplated greenfield power projects.
Vertically integrate complementary businesses. SMC Global Power intends to continue to
expand into businesses along the power sector value chain that complement its current power
generation business. SMC Global Power has obtained an RE S license through SMELC to
expand its customer base and diversify its sales. With the open access and retail competition
fully implemented, the retail electricity supplier license allows SMC Global Power through SMELC
to enter into retail electricity supply agreements with Contestable Customers. In addition, SMC
Global Power has invested in distribution assets, namely OEDC and APEC, which create a
competitive advantage through integrated generation and distribution operations. On the other
hand, SMC Global Power, through SMEC and its subsidiaries, Bonanza Energy, Daguma Agro
and Sultan Energy, has acquired coal exploration, development and production rights over
approximately 17,000 hectares of land in Mindanao. If SMC Global Power is able to develop
these assets and commence mining operations successfully, SMC Global Power through
SMEC and its subsidiaries, expects these assets could potentially provide a source of coal fuel
supply for its greenfield power projects. SMC Global Power believes that such vertical integration
will provide it with a competitive advantage in the Philippine power market.
Leverage operational synergies. SMC Global Power intends to establish a track record of
reliability by partnering with world-class IPP partners. SMC Global Power believes that the high
caliber of these IPP partners enhances the likelihood that the IPPA Power Plants are in
good working condition if SMEC, SPDC and SPPC exercise their respective options to
purchase them upon the expiration of their IPPA Agreements. SMC Global Power, through
PVEI, also gains knowledge and expertise with its joint venture partnership with Korea Water
Resource Corporation (K-Water) in AHEPP. SMC Global Power believes that this approach
complements its strategic development of greenfield power projects. Further, SMC Global
Power creates operational synergies within and among its subsidiaries by performing key
85

management functions at the holding company level under management agreements. Key
management functions include sales and marketing, energy trading, finance, legal, human
resources, and billing and settlement. This allows all the subsidiaries to benefit from the wealth
of experience of the management team of SMC Global Power while optimizing initiatives at a
portfolio level.
IPPA FRAMEWORK
PSALM, together with NPC, has ECAs or other PPAs in place with various IPPs in the
Philippines. Under the EPIRA, PSALM is required to achieve, through open and competitive
bidding, the transfer of the management and control of at least 70% of the total energy
output of the IPP plants under contract with NPC to IPPAs pursuant to IPPA Agreements,
such as those held by SMC Global Power, through SMEC, SPDC and SPPC.
Under IPPA Agreements, the IPPAs have the right to sell the electricity generated by such IPP
in the WESM and also by entering into PSCs with specific customers and will, in general,
manage procurement of the fuel supply to the associated IPP. The IPPA has to pay PSALM a
fixed monthly payment and a variable energy or generation fee the amount of which depends
on the dispatch and performance of the IPP. IPPA Agreements provide relief for IPPAs such
as SMC Global Power, through SMEC, SPDC and SPPC, in the event the associated IPPs are
unable to dispatch for a certain period of time not due to the fault of the IPPA.
PSALM/NPC in turn, pays the IPPs capacity and energy payments based on their respective
ECAs or PPAs. In some cases, IPPA Agreements provide the IPPA with the right to acquire
ownership of the power plants or generation facilities at the end of the terms of the ECAs or
PPAs. Under the IPPA Agreements of SMEC, SPDC and SPPC, these subsidiaries of SMC
Global Power have the right to acquire the Sual Power Plant in October 2024, the Ilijan Power
Plant in June 2022 and the San Roque Power Plant in May 2028 or at an earlier date due to
certain events such as changes in applicable law or non-performance by the IPP.
The IPPA framework is intended to provide successful bidders a way to enter and trade in the
WESM for a minimal capital outlay without the expense of building a new power plant and for
IPPAs to enjoy the benefits normally attributed to owners of power generation plants, including
controlling the fuel and its dispatch, trading, and contracting of the power plant, without
maintenance costs or capital upgrades, which remain with the IPPs. Also, many of the risks of
owning a power plant are explicitly managed through the contract. If there is an extended
outage at the power generation plants, for example, there is up to a 50% discount on the
monthly fees, and PSALM bears the force majeure risks to the power generation plants. The
IPPA framework also permits an IPPA to assume the role of NPC as an offtaker of power
generated by IPPs without affecting NPCs underlying agreements with the IPP.
IPPAs are permitted to trade in the WESM, and are also free to enter into bilateral contracts
and seek other markets for the balance of their contracted capacities and energy, as well as
enter into other forms of financial hedging instruments if desired to manage their position in and
exposure to the market.

86

Set forth below is a general illustration of the IPPA framework.

87

SMC GLOBAL POWER PORTFOLIO


The map below sets out the locations and contracted capacities of the power plants for which
SMC Global Power, through its subsidiaries, acts as IPPA, owns or operates, as well as the
greenfield power projects that are currently under construction.

88

CORPORATE STRUCTURE1 / PROJECT CONSORTIUM


The chart below provides an overview of the ownership structure of SMC Global Power and its
major operating subsidiaries as of December 31, 2015.

SMC Global Power also owned, from September 2010 through August 2011, a 620 MW oil-fired
power plant located in Limay, Bataan (Limay Combined Cycle Plant). In August 2011, SMC
Global Power sold its 100% equity interest in Panasia Energy Holdings Inc. (Panasia Energy),
the company that owns the Limay Combined Cycle Plant. Accordingly, the Limay Combined
Cycle Plant is accounted for as discontinued operations in the consolidated financial statements
of SMC Global Power as of and for the year ended December 31, 2011.
Neither SMC Global Power nor any of its subsidiaries or associates has ever been subject to
any bankruptcy, receivership or similar proceedings. None of the subsidiaries of SMC Global
Power has ever been a party to any merger or consolidation.
CORPORATE HISTORY AND MILESTONES
San Miguel Corporation entered the power business in 2009, when it successfully acquired,
through privatization auctions by PSALM, the IPPA rights for the Sual Power Plant. In order
to consolidate its power generation business, San Miguel Corporation eventually transferred
these assets into SMC Global Power. In September 2010, SMC Global Power became a
wholly-owned subsidiary of San Miguel Corporation.
The following timeline sets forth key events in the corporate history of SMC Global Power:
January 2008 . . . . . . . . . . . . . . . . . . . . . . . . .

SMC Global Power is incorporated under the name


Global 5000 Investment Inc. (renamed SMC Global
Power Holdings Corp. in October 2010)

January 2009 . . . . . . . . . . . . . . . . . . . . . . . . .

SMC Global Power acquires a 6.13% equity interest


in Meralco, which was eventually sold in December
2013.

November 2009 . . . . . . . . . . . . . . . . . . . . . . .

A San Miguel Corporation subsidiary,


becomes the IPPA for the Sual Power Plant.
89

SMEC,

SMC Global Power acquires a 60% equity interest in


SMEC, the company that is the IPPA for the Sual
Power Plant.
January 2010 . . . . . . . . . . . . . . . . . . . . . . . . .

A San Miguel Corporation subsidiary, SPDC,


becomes the IPPA for the San Roque Power Plant.
A San Miguel Corporation subsidiary, Panasia
Energy, acquires the Limay Combined Cycle Plant.
SMEC acquires a 100% equity interest in Bonanza
Energy and Daguma Agro, the companies having
coal mining rights over approximately 10,000
hectares in Lake Sebu, South Cotabato and
Tuanadatu, Maitum, Saranggani Province in
Mindanao.

March 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . .

SMC Global Power acquires from San Miguel


Corporation a 60% equity interest in SPDC, the IPPA
for the San Roque Power Plant.

May 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SMEC acquires a 100% equity interest in Sultan


Energy, with coal mining rights over approximately
7,000 hectares in Lake Sebu, South Cotabato and
Bagumbayan, Sultan Kudarat in Mindanao.

June 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A San Miguel Corporation subsidiary,


becomes the IPPA for the lijan Power Plant.

September 2010 . . . . . . . . . . . . . . . . . . . . . . .

SMC Global Power becomes a wholly-owned


subsidiary of San Miguel Corporation, and acquired
from San Miguel Corporation:

SPPC

August 2011 . . . . . . . . . . . . . . . . . . . . . . . . . .

a 100% equity interest in SPPC, the company


that is the IPPA for the Ilijan Power Plant;

a 100% equity interest in Panasia Energy, which


owns the Limay Combined Cycle Plant; and

the remaining 40% equity interests in SMEC and


SPDC, the IPPAs for the Sual and San Roque
Power Plants.

SMC Global Power sells its 100% equity interest in


Panasia Energy, which owns the Limay Combined
Cycle Plant, to a third party, Millennium Holdings,
Inc.
San Miguel Corporation transfers to SMC Global
Power its 100% equity interest in SMELC. SMELC
holds an RES license from the ERC.

January 2013 . . . . . . . . . . . . . . . . . . . . . . . . .

Execution of EPC Contract with Formosa Heavy


Industries, for the construction of the Limay and
Davao Greenfield Power Plants.

July 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Groundbreaking of the 2 x 150 MW Davao Greenfield


Power Plant.

September 2013 . . . . . . . . . . . . . . . . . . . . . . .

SMC Global Power is awarded as the winning


90

concessionaire for the rehabilitation, operations and


maintenance of ALECO.
SMC Global Power, through SPI (a wholly owned
subsidiary),
acquires the 140 MW Limay
Cogeneration Plant from Petron Corporation.
SMC Global Power agreed to sell its 6.13% interest
in Meralco. The sale was completed in March 2014.
October 2013 . . . . . . . . . . . . . . . . . . . . . . . . .

Groundbreaking of the 2 x 150 MW Limay Greenfield


Power Plant.

February 2014 . . . . . . . . . . . . . . . . . . . . . . . .

Start of APECs concession of ALECOs distribution


franchise.

November 2014 . . . . . . . . . . . . . . . . . . . . . . .

SMC Global Power acquired 60% of AHC, the


owner and operator of the AHEPP.

July 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Groundbreaking of the AHEPP rehabilitation.

IPPA POWER PLANTS


The table below summarizes information regarding the power plants whose generation capacity
is managed and sold by SMC Global Power under IPPA rights.

Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . .
IPPA Acquisition Date . . . . . . . . . . . . . . . . .
.Plant
.
Commercial Operation Date . . . . . . . .
.Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . .

Installed Capacity (MW) . . . . . . . . . . . . . . . .


.
Net Contracted Capacity (MW) . . . . . . . . . .
Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Plant Name
Sual
San Roque
Ilijan
San Miguel Energy Strategic Power Devt. South Premiere Power
Corporation
Corp.
Corp.
11/2009
1999

3/2010
2003

9/2010
2002

Marubeni
Korea Electric Power,
Marubeni Corporation,
Corporation, Tokyo
Corporation, Mitsubishi
Kansai Electric
Electric Power
Corporation, TeaM
Company Ltd.(3)
(1)
Corporation
Energy(2)
2 x 647

3 x 137

2 x 635.5

1,000(4)

345(5)

1,200

Coal

Hydro-electric

Natural Gas

Fuel Supply . . . . . . . . . . . . . . . . . . . . . . . . . .

PT Bukit Asam
(Persero) TBK,
Glencore
International AG, PT
Trubaindo Coal
Mining, Noble
Resources
International Pte Ltd.,
Vitol Asia Pte. Ltd.,
PT Kaltim Prima
Coal, Avra
Commodities Pte.
Ltd.

N/A

Camago-Malampaya
Gas Fields (through
NPC/PSALM)

Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

93% bilateral
contract(6)

46% WESM

93% bilateral
contract(7)

91

Plant Name
Sual

San Roque

Ilijan

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

75%

23%

82%

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

69%

35%

71%

Availability factor (%)


2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

90%

100%

98%

Net Capacity Factor (%)

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82%
98%
Offtakers . . . . . . . . . . . . . . . . . . . . . . . . . . . . Meralco, ECs, DUs, Intercompany, WESM
DCCs, CCs,
WESM(8)
Income Tax Holiday (ITH) Expiry(9) . . . . .
........
IPPA Expiry / Asset Transfer Date . . . . . . .
.
(1)
(2)
(3)
(4)

85%
Meralco, WESM

July 2014

July 2014

July 2014

October 2024

April 2028

June 2022

Through TeaM Sual Corporation (TeaM Energy).


Through KEPCO Ilijan Corporation (KEILCO).
Through San Roque Power Corporation.
SMEC is entitled to dispatch up to 1,000 MW, which is the net contracted capacity of the Sual Power Plant. The owner of the
plant has the right to generate power in excess of the dispatch instructions of SMEC and sell such excess generation.

(5) SPDC expects the San Roque Power Plant to generate power at levels below its contracted capacity due to water levels in
the reservoir and downstream irrigation requirements.
(6) Unit 1 of the Sual Power Plant is fully contracted to Meralco under a long-term offtake agreement while the capacity of Unit
2 of the Sual Power Plant is contracted to various distribution utilities, electric cooperatives and industrial customers under
existing PSCs.
(7) The entire capacity of the Ilijan Power Plant is contracted to Meralco under a long-term power supply agreement up to 2019,
which can be extended up to the end of the IPPA.
(8) ECs: Electric Cooperatives; DUs: Distribution Utilities; DCCs: Directly Connected Customers; and CCs: Contestable
Customers.
(9) SMEC, SPPC, and SPDC are registered with the Board of Investments as administrator or operator of their respective power
plants on a pioneer status with non-pioneer incentives and were granted ITH for four years without extension, beginning on
August 1, 2010 up to July 31, 2014, subject to compliance with certain requirements under their registrations. The ITH
incentives are limited only to the sale of power generated from these power plants.

Sual Power Plant


Background
The Sual Power Plant is a 2 x 647 MW coal-fired thermal power plant located in Sual,
Pangasinan on the Lingayen Gulf that commenced commercial operations in October 1999, and
is the largest coal-fired thermal power plant in the Philippines in terms of installed capacity. The
Sual Power Plant was built by CEPA Pangasinan Electric Limited pursuant to an ECA with NPC
under a 25-year Build-Operate-Transfer (BOT) scheme that expires on October 24, 2024. In
2007, TeaM Energy, which is a joint venture between Marubeni Corporation and Tokyo Electric
Power Corporation, acquired the Sual Power Plant.
On September 1, 2009, SMEC, a wholly owned subsidiary of SMC Global Power, was declared
the winning bidder and received the notice of award for the IPPA for the Sual Power Plant. On
November 6, 2009, SMEC assumed the administration of the Sual Power Plant in accordance
with the provisions of the IPPA Agreement.
Sual IPPA
Power Plant Capacity and Fuel Supply
SMC Global Power, through its wholly-owned subsidiary, SMEC, has the contractual right to
manage, control, trade, sell or otherwise deal in up to 1,000 MW of the generation capacity of
the Sual Power Plant pursuant to Sual IPPA Agreement. TeaM (Philippines) Energy
Corporation (TPEC), an affiliate of TeaM Energy, is allowed to sell the remaining balance.
TeaM Energy, as the IPP, has the right to generate power in excess of the dispatch instructions
92

of SMEC and to sell such excess generation. For purposes of this Prospectus, the contracted
capacity of the Sual Power Plant is 1,000 MW.
SMEC must supply and deliver, at its own cost, the fuel that is necessary for the power plant to
generate the power that SMEC requires TeaM Energy to produce. TeaM Energy is responsible
for supplying fuel at its own cost to the Sual Power Plant to produce power in excess of the
dispatch instructions of SMEC.
IPPA Fees
SMEC pays PSALM a monthly fee that consists of a fixed payment and a variable energy fee.
The fixed payment consists of agreed amounts (in U.S. dollars and Pesos) for the applicable
month set out in the Sual IPPA Agreement. The specific amount of the fixed monthly payments
under the Sual IPPA Agreement increases over the life of the agreement, and the amounts and
timing of such increases are specified in a schedule to the agreement. In any month in which a
unit of the Sual Power Plant is unable to produce power for at least three non-delivering days,
these agreed amounts are reduced in proportion to the number of non-delivering days in that
month. A non-delivering day means a 24-hour period during which a unit is unable to produce
power for reasons specified in the Sual IPPA Agreement, including planned and unplanned
outages arising from causes not attributable to SMEC.
In addition, SMEC must pay monthly energy fees that are periodically adjusted for inflation and
that consist of (i) a fixed base energy rate for power actually delivered by the Sual Power
Plant comprising both a U.S. dollar and Peso component plus (ii) a variable energy rate for
power actually delivered by the Sual Power Plant, in U.S. dollars only, that takes into account
the cost and efficiency of fuel supplied to the Sual Power Plant as well as the efficiency (unit
heat rate) of the Sual Power Plant, which is measured on an annual basis.
Other Provisions
Offtake agreements with certain customers were also assigned to SMEC by NPC/PSALM.
SMEC is required to perform the obligations of NPC under the NPC-assigned offtake
agreements, including the obligation to procure power at its own cost to meet deficiencies, in
cases where the Sual Power Plant is unable to supply the contracted power. To date, all
assigned offtake agreements have expired. SMEC is also required to maintain a U.S.$58 million
performance bond in favor of PSALM. PSALM remains responsible to TeaM Energy for the
payment obligations of NPC under the Sual ECA.
While SMEC is granted the right to coordinate with TeaM Energy, on behalf of NPC, on matters
relating to management of the generation capacity of the Sual Power Plant, SMEC cannot
directly enforce the Sual ECA against TeaM Energy or NPC. Any claims for damages for breach,
or other entitlement, benefit or relief under the Sual IPPA Agreement arising from the breach by
TeaM Energy of its Sual ECA obligations must be claimed by SMEC against PSALM through
an equivalent relief claim (ER Claim). PSALM will then include the ER Claim in its claims
against TeaM Energy (the PSALM ER Claim). The Sual IPPA Agreement does not permit setoff of claims, and SMEC is only entitled to payment of its ER Claim after PSALM has received
payment from TeaM Energy of its corresponding PSALM ER Claim.
Under the Sual IPPA Agreement, SMEC has the option to acquire the Sual Power Plant in
October 2024 without any additional payment by SMEC. SMEC may exercise the option to
acquire the Sual Power Plant prior to October 2024 under certain circumstances, such as
changes in law or non-performance by TeaM Energy of its obligations under the Sual ECA. In
this case, the transfer price will be the net present value of the sum of the agreed monthly
payments remaining unpaid at the date of termination of the Sual IPPA Agreement.
The Sual IPPA Agreement may be terminated by either SMEC or PSALM due to certain force
majeure events. In case of such termination, SMEC is entitled to receive from PSALM a
termination payment equal to the aggregate agreed monthly payments paid by SMEC up to the
93

date of termination less the aggregate capital recovery fees, fixed operating and maintenance
fees, infrastructure fees and service fees paid or payable by PSALM up to the termination date
of the Sual IPPA Agreement.
Power Offtakers
Unit 1 of the Sual Power Plant is fully contracted to Meralco under a long-term offtake
agreement expiring 2019 subject to extension up to 2024, while the capacity of Unit 2 of the
Sual Power Plant is contracted to various distribution utilities, electric cooperatives and industrial
customers under existing PSCs.
For PSCs assigned by PSALM to SMEC, the rate is based on the prevailing rate structure of
NPC as approved by the ERC. While the aforementioned PSCs have expired, SMEC has
entered into new contracts with many of the same customers, and sold the remaining capacity to
new customers.
For energy based contracts entered into by SMEC directly with new offtakers on a bilateral basis
(or with those offtakers under previously assigned offtake agreements which have expired),
pricing is based on a reasonable return over the cost structure of SMEC and benchmarked to
the basic rates of NPC. The components for pricing comprise a Basic Energy Rate (BER),
also on a time-of-use basis, and a monthly Basic Energy Rate Adjustment (BERA) charge
similar to the Automatic Cost Adjustment Mechanism (ACA) charge of NPC.
The components for the BERA include adjustments for fuel, foreign exchange and inflation
costs. Any changes to the level of the BER and/or the BERA are not affected by movements in
the charges of NPC.
For capacity-based contracts, pricing is based on a fixed and variable payment. The fixed
payment represents the monthly fixed payments to PSALM and fixed operating and
maintenance expenses. The variable payment represents the energy fee, fuel and variable
operating and maintenance expense.
Operations Review
The table below is a summary of operating statistics of the Sual Power Plant for the periods
indicated.
2013

Actual Energy Generated (GWh) . . . . . . . . . . . . . . . . . . . . .


Electricity sold (GWh): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
of which: bilateral offtake agreements . . . . . . . . . . . . . . . .
of which: WESM sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average realized electricity prices(/MWh):
for electricity sold under bilateral offtake agreements . . . . .
. for electricity sold on WESM . . . . . . . . . . . . . . . . . . . . . . . .
.Net Capacity Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Availability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reliability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.Average Net Dependable Capacity (MW) . . . . . . . . . . . . . . .
Net Heat Rate (Kilo-Calorie/Kilowatt hour or Kcal/KWh)
(Lower heating value or LHV) . . . . . . . . . . . . . . . . . . . . . .

94

Year ended December 31,


2014
2015

6,427
7,084
6,101
983

6,536
7,132
6,393
740

6,066
7,617
7,048
569

4,555
4,071
73
88
98
999

4,611
4,438
75
90
97
999

4,439
3,609
69
82
99
915

2,458

2,410

2,427

Fuel Supply
The table below sets forth certain information regarding the supply of coal to the Sual
Power Plant as of the periods indicated.

2013

Metric tons (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Average calorific value (kcal/kg) . . . . . . . . . . . . . . . . . . . . .
( millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average price per metric ton () . . . . . . . . . . . . . . . . . . . . .

Year ended December 31,


2014
2015

2,543.4
6,144.0
10,715.7
4,213.2

2,531.2
6,190.7
9,732.8
3,845.2

2,381.8
6,131.0
7,811.7
3,279.7

SMEC is currently formalizing a coal supply agreement with KPC which will ensure coal supply
from 2016 to 2024, subject to the extension of KPCs coal contract of work in 2021. Under the
coal supply agreement, KPC will supply an annual total of 24 panamax shipments, each
comprising 65,000 metric tons. Pricing under the coal supply agreement will be subject to
adjustment based on certain standards applicable to the quality or grade of the coal delivered by
KPC. SMEC also has other coal supply contracts with other suppliers.
Operations and Maintenance
The Sual Power Plant is operated by TeaM Energy. Under the Sual ECA, TeaM Energy is
responsible at its own cost, for the management, operation, maintenance, including the supply of
consumables and spare parts, and the repair of the Sual Power Plant. TeaM Energy is required
to use its best endeavors to ensure that the Sual Power Plant is in good operating condition
and capable of converting fuel supplied by SMEC under the Sual IPPA Agreement into
electricity in a safe and reliable manner.
The maintenance plan for the Sual Power Plant is agreed upon annually between SMEC, NPC,
PSALM, NGCP and TeaM Energy. The maintenance plan includes scheduled inspections and
overhauls, including scheduled periods of outage. Planned outages for maintenance are
scheduled in such a way that only one unit is scheduled for shut down at any given time. The
maintenance plan is established with consideration given to the dispatch requirements of
SMEC and recommendations of the plant manufacturer. TeaM Energy is required to execute the
maintenance plan in accordance with the recommendations of the original equipment
manufacturer and good utility practice. TeaM Energy performs periodic maintenance activities on
the generating units of the Sual Power Plant during the course of the operations of the plant.
The Sual ECA requires TeaM Energy to conduct an annual test to check the capacity and heat
rate of the generating units of the Sual Power Plant, if requested by SMEC.
Each of the generating units of the Sual Power Plant historically has been, and is expected to
continue to be, shut down for routine maintenance for approximately 30 days per calendar year.
SMEC also expects that TeaM Energy will shut down these units for more significant
maintenance and repair work for a total of approximately 60 days in every fifth calendar year.
The table below sets forth actual planned outages of the Sual Power Plant for the periods
indicated.
2013

Unit 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unit 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year ended December 31,


2014
2015

38 days
30 days

29 days
30 days

27 days
60 days

In 2015, Unit 2 of the Sual Power Plant underwent major scheduled maintenance which
occurs once every 5 years. Unit 1 of the Sual Power Plant is scheduled to undergo its 60-day
major scheduled maintenance in 2016.

95

The table below sets forth unplanned outages of the Sual Power Plant for the periods indicated.
2013

Unit 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unit 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year ended December 31,


2014
2015

7 days
11 days

12 days
6 days

7 days
34 days

The 34 days forced outages was mostly due to an extended maintenance outage from
November 16 - December 17, 2015 due to repairs of localized generator stator hot spots &
looseness on generator core and lamination plates.
Power Transmission
Power from the Sual Power Plant is transmitted through a 25-kilometer 230 kV transmission line
from the Sual Power Plant switchyard to the Kadampat Substation located at Labrador,
Pangasinan. The transmission line is owned by TransCo and operated and maintained by its
concessionaire, the NGCP.
San Roque Power Plant
Background
The 345 MW San Roque multi-purpose hydroelectric power plant in San Manuel, Pangasinan
commenced operations on May 1, 2003 and is a peaking plant that was constructed by a
consortium composed of Marubeni Corporation, Sithe Philippines Holdings, Ltd., and ItalianThai Development Public Company Limited pursuant to a PPA with NPC under a BOT scheme
(the San Roque PPA).
The San Roque Power Plant utilizes the Agno River for peaking power, irrigation, flood control
and water quality improvement for the surrounding region, and comprises three power
generation units of 115 MW each. The San Roque Power Plant provides an annual energy
generation of 1,065 GWh from the 345 MW hydroelectric power plant, the irrigation of
approximately 34,450 hectares of agricultural land, storage of water that would otherwise flood
the Pangasinan plains, and improvement of water quality of the Agno River which, otherwise,
would pollute the downstream rivers.
On December 15, 2009, SPDC, a wholly owned subsidiary of SMC Global Power, successfully
bid for the appointment to be the IPPA for the San Roque Power Plant and received a notice
of award on December 28, 2009. SPDC assumed administration of the San Roque Power Plant
on January 26, 2010 in accordance with an IPPA Agreement with PSALM (the San Roque
IPPA Agreement). PSALM remains responsible under the San Roque PPA to remunerate the
IPP of the San Roque Power Plant for the electricity it produces.
San Roque IPPA
Power Plant Capacity
PSALM and SMC Global Power (through SPDC) executed the San Roque IPPA Agreement
pursuant to which SPDC has the right to manage, control, trade, sell or otherwise deal in the
electrical generation capacity of the San Roque Power Plant, while NPC, which owns and
operates the dam and related facilities thereof, obtained and maintains water rights necessary
for the testing and operation of the power plant. SPDC is required to assist PSALM so that the
San Roque Power Plant can draw water from the Agno River required by the power plant and
necessary for it to generate the electricity required to be produced under the San Roque PPA
of NPC with San Roque Power Corporation (SRPC). In addition, SPDC must pay fixed monthly
payments comprising both a U.S. dollar and Peso component. These fixed monthly payments
are reduced when there is a plant outage for reasons not attributable to SPDC. In addition,
SPDC pays a fixed generation fee of 1.30 per KWh. While the contracted capacity of
SPDC is 345 MW, it may generate up to 411 MW depending on the water level and inflow to the
San Roque reservoir. Accordingly, for purposes of this Prospectus, the contracted capacity of
96

the San Roque Power Plant is referred to as 345 MW.


Minimum Run Rate
The San Roque PPA requires NPC to Take-or-pay for a minimum amount of power from the San
Roque Power Plant. The minimum amount required increases from 85 MW through April
2007, 95 MW from May 2007 through April 2013, 110 MW from May 2013 through April 2017
and 115 MW from May 2018 through April 2028. Under the San Roque IPPA Agreement,
SPDC is contractually obligated to purchase the minimum amount of power that NPC is
obligated to Take-or-pay for under the San Roque PPA.
IPPA Fees
SPDC pays PSALM a monthly fee that consists of a fixed payment and a variable energy fee.
The fixed payment consists of agreed amounts (in U.S. dollars and Pesos) for the applicable
month as set out in the San Roque IPPA Agreement. The specific amount of the fixed monthly
payments under the San Roque IPPA Agreement increases over the life of the agreement, and
the amounts and timing of such increases are specified in a schedule to the agreement. In any
month that the San Roque Power Plant is unable to produce power for at least three nondelivering days, these fixed amounts are reduced in proportion to the number of non-delivering
days in that month. A non-delivering day means a 24-hour period during which the San Roque
Power Plant is unable to produce power for reasons specified in the San Roque IPPA
Agreement, including unplanned outages arising from causes not attributable to SPDC. No
reduction in the fixed payment is made if the San Roque Power Plant is unable to produce
power due to planned outages.
The energy fee is computed based on the actual energy delivered by the San Roque Power
Plant at a fixed price of 1.30 per kWh. The actual energy delivered and dispatched by the
San Roque Power Plant at any given time is dependent on the water levels in the reservoir and
downstream irrigation requirements at that time.
Other Provisions
The San Roque IPPA Agreement requires SPDC to maintain a performance bond in favor
of PSALM equivalent to U.S.$20 million. Under the San Roque IPPA Agreement, SPDC has the
right to acquire the San Roque Power Plant in May 2028, which is the end of the cooperation
period between NPC and SRPC under the San Roque PPA, or on some earlier date due to
certain events such as changes in law or non- performance by SRPC under the San Roque
PPA.
While SPDC is granted the right to coordinate with SRPC, on behalf of NPC, on matters relating
to management of the generation capacity of the San Roque Power Plant, SPDC cannot
directly enforce the San Roque PPA against SRPC or NPC. Any claims for damages for breach,
or other entitlement, benefit or relief under the San Roque IPPA Agreement arising from the
breach of SRPC of its San Roque PPA obligations must be claimed by SPDC against PSALM
through the ER Claim and the PSALM ER Claim mechanism. Under the San Roque IPPA
Agreement, SPDC has the option to acquire the San Roque Power Plant in May 2028 without
any additional payment by SPDC. SPDC may exercise the option to acquire the San Roque
Power Plant prior to May 2028 under certain circumstances, such as changes in law or nonperformance by SRPC of its obligations under the San Roque PPA. In the case of nonperformance by SRPC, the transfer price will be the net present value of the sum of the agreed
monthly payments remaining unpaid at the date of termination of the San Roque IPPA
Agreement. Upon the occurrence of a change in law, SPDC is required to receive from PSALM a
termination payment equal to the aggregate agreed monthly payments paid by SPDC up to the
date of termination less the aggregate capacity fees and operating fees paid or payable by
PSALM to the IPP under the IPPA Agreement up to the termination date of the San Roque IPPA
Agreement.
97

The San Roque IPPA Agreement may be terminated by either SPDC or PSALM due to certain
force majeure events. In case of such termination, SPDC is entitled to receive from PSALM a
termination payment equal to the aggregate agreed monthly payments paid by SPDC up to the
date of termination less the aggregate capital recovery, operating and watershed management
fees paid or payable by NPC/PSALM to SRPC from the effective date of the San Roque IPPA
Agreement up to the termination date of the San Roque IPPA Agreement.
The San Roque Power Plant is a peaking plant. Under the terms of the San Roque PPA, power
and energy are delivered to SPDC at the delivery point (the high voltage side of the step-up
transformers) located at the perimeter fence of the San Roque Power Plant site. SPDC is
responsible for contracting with the NGCP to wheel power from the delivery point.
Operations Review
The table below is a summary of operating statistics of the San Roque Power Plant during the
periods indicated.
2013

Actual Energy Generated (GWh) . . . . . . . . . . . . . . . . . . . . .


Electricity sold (GWh): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
of which: bilateral offtake agreements . . . . . . . . . . . . . . . .
. of which: WESM sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.Average realized electricity prices(/MWh):
for electricity sold under bilateral offtake agreement
for electricity sold on WESM . . . . . . . . . . . . . . . . . . . . . . . .
.Net Capacity Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Availability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reliability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average Net Dependable Capacity (MW) . . . . . . . . . . . . . . .

Year ended December 31,


2014
2015

785
795
83
712

695
841
242
599

1,066
1,589
863
726

13,137
4,943
26
97
100
411

6,302
5,796
23
100
100
411

5,096
3,965
35
98
100
415

Water Rights
The generated output energy of the San Roque Power Plant is limited by the Irrigation
Diversion Requirements set by the National Irrigation Administration of the Philippines. Water
allocation is usually dictated by rule curve that is derived from historical data of river flows and
water demands. A rule curve shows the minimum water level requirement in the reservoir at
a specific time to meet the particular needs for which the reservoir is designed. The rule
curve must generally be followed except during periods of extreme drought and when public
interest requires. In general, the rule curve dictates the following:

Water Level Above The Upper Rule Curve All demands for water supply and
irrigation are met and electricity can be generated at the full capacity of the turbine units.
Excess inflow is discharged through the spillway. Water released through the spillway is
controlled and regulated by the NPC Dam Office personnel.

Between Upper And Lower Rule Curves All demands for water supply and
irrigation are satisfied. Generation of electricity is limited to the released water for water
supply and irrigation. Further water releases for power generation are allowed provided
that the Auxiliary Units are utilized first before Main Units.

Water Level Below Lower Rule Curve The remaining water in the reservoir is
reserved for water supply and irrigation. Generation of electricity is limited to these water
releases. If necessary, no further water release for power generation is allowed.

Generally, the output energy of San Roque Power Plant is high during planting seasons which
covers the months of December through April (dry planting season) and July through September
(wet planting season). The water releases from the dam, and thus, energy generation, during the
dry planting season is much higher due to the absence of rain. The water rights of NPC are used
98

by the San Roque Power Plant, and NPC, until the date of transfer of the San Roque Power
Plant to NPC (or SPDC, as the case may be), must obtain such renewals or extensions as may
be required to maintain the water rights in full force and effect at all times. NPC derives its
water rights from a permit granted by the National Water Resources Board.
Operations and Maintenance
SRPC is responsible for the operations and maintenance of the San Roque Power Plant for
25 years effective May 1, 2003. SRPC is owned by Marubeni Corporation and Kansai Electric
Power Company Ltd. Under the San Roque PPA, SRPC is responsible for the management,
operation, maintenance and repair of the San Roque Power Plant at its own cost until
transfer to NPC or SPDC, as the case may be. As operator, SRPC is entitled to conduct
the normal inspection, regular maintenance, repair and overhaul for a period of 15 days for
each unit comprising the San Roque Power Plant. In addition, SRPC has the right to enter into
contracts for the supply of materials and services, including contracts with NPC; appoint and
remove consultants and professional advisers; purchase replacement equipment; appoint,
organize and direct staff; manage and supervise the power plant; establish and maintain regular
inspection, maintenance and overhaul procedures; and otherwise run the power plant within the
operating parameters set out in the San Roque PPA.
The maintenance plan for the San Roque Power Plant is agreed upon annually between
SPDC, NPC, PSALM, NGCP and SRPC. The maintenance plan includes scheduled inspections
and overhauls, including scheduled periods of outage and details as to the personnel required to
complete each inspection. Planned outages for maintenance of the generating units are
scheduled in such a way that only one unit is shut down at any given time. The power tunnel that
delivers water from the reservoir to the generating units also undergoes routine annual
maintenance inspections, during which all units are shut down. The maintenance plan is
established with consideration given to the dispatch requirements of SPDC and
recommendations of the plant manufacturer. SRPC is required to execute the maintenance plan
in accordance with the recommendations of the original equipment manufacturer and good utility
practice. SRPC performs periodic maintenance activities on the generating units of the San
Roque Power Plant during the course of the operation of the plant. The San Roque PPA
requires SRPC to conduct an annual test to check the capacity of the generating units of the
San Roque Power Plant. As of the date of this Prospectus, the generating units of the San
Roque Power Plant have attained and maintained the required contracted capacity specified in
the San Roque PPA.
Each of the generating units of the San Roque Power Plant historically has been, and is
expected to continue to be, shut down for routine maintenance for approximately 15 days per
calendar year sometime between April to June of each year, when water levels at the reservoir
are low. Since 2010, during periods when a generating unit is shut down for routine
maintenance, the San Roque Power Plant has historically been, and is expected to continue to
be, able to generate power at the applicable minimum run rate from the other generating units.
The San Roque Power Plant does not have a regular schedule for significant maintenance and
repair work.
The power tunnel that delivers water from the reservoir to the generating units also undergoes
routine maintenance inspections for approximately 15 days per calendar year. Power tunnel
inspections historically have been, and are expected to continue to be, conducted between
April to June of each year, after the end of the irrigation period and when water levels at the
reservoir are low.

99

The table below sets forth the actual planned outages of the power tunnel for the San Roque
Power Plant for the periods indicated.
2013

Year ended December 31,


2014

2015

10 days
(May 25 to June 25)

3 days
(May 27 to May 29)

6 days
(May 26 to June 1)

Power Transmission
Power from the San Roque Power Plant is transmitted through a nine-kilometer 230 kV
transmission line from the San Roque Power Plant switchyard to the San Manuel substation
located in Pangasinan. The transmission line is owned by TransCo, and operated and
maintained by NGCP.
Ilijan Power Plant
Background
The Ilijan Power Plant commenced commercial operations on June 5, 2002, and is located on a
60-acre site at Arenas Point, Barangay Ilijan, Batangas City. The Ilijan Power Plant was
constructed and is owned by KEILCO pursuant to a 20-year ECA with NPC under a BOT
scheme that expires on June 4, 2022. NPC/PSALM supplies natural gas to the Ilijan Power Plant
from the Malampaya gas field in Palawan under a gas supply agreement with Shell Exploration
Philippines BV. The Ilijan Power Plant consists of two blocks with a rated capacity of 600 MW
each.
The power plant can also run on diesel oil stored on site. On April 16, 2010, San Miguel
Corporation successfully bid for the appointment to be the IPPA for the Ilijan Power Plant and
received a notice of award on May 5, 2010. On June 10, 2010, San Miguel Corporation and
SPPC, a wholly owned subsidiary of SMC Global Power, entered into an assignment agreement
with assumption of obligations whereby San Miguel Corporation assigned all of its rights and
obligations with respect to the Ilijan Power Plant to SPPC, which assumed administration of the
Ilijan Power Plant on June 26, 2010 in accordance with an IPPA Agreement with PSALM.
Ilijan IPPA
Power Plant Capacity and Fuel Supply
SMC Global Power, through its wholly-owned subsidiary, SPPC, has the contractual right to
manage, control, trade, sell or otherwise deal in the generation capacity of the Ilijan Power Plant
pursuant to the Ilijan IPPA Agreement. Although the installed capacity of the Ilijan Power Plant
totals 1,271 MW, ERC records attribute to SPPC a capacity of 1,200 MW for the Ilijan Power
Plant. Accordingly, for purposes of this Prospectus, the contracted capacity of the Ilijan Power
Plant is referred to as 1,200 MW.
Under the Ilijan ECA, NPC/PSALM is required to deliver and supply to KEILCO the fuel
necessary to operate the Ilijan Power Plant. If natural gas is unavailable, SMC Global Power,
through SPPC, may require KEILCO to run the Ilijan Power Plant using diesel fuel. NPC/PSALM
remains responsible for securing the natural gas and diesel fuel supply to the Ilijan Power Plant.
IPPA Fees
SPPC must pay fixed monthly payments comprising both a U.S. dollar and Peso component. In
addition, SPPC must pay monthly generation payments comprising a must pay amount for
electricity sold up to a given volume (the Must Pay Volume) and a variable amount for
electricity sold in excess of the Must Pay Volume.
As discussed in Note 28(b), Note 27(b) and Note 27(a) of the Issuers audited consolidated
financial statements, as of and for the years ended December 31, 2015, December 31, 2014,
100

and December 31, 2013, respectively, the Issuer and PSALM have an ongoing dispute arising
from differing interpretations of certain provisions related to generation payments under the Ilijan
IPPA Agreement. As a result of such dispute, the parties have arrived at different computations
regarding the subject payments. For a more detailed discussion of said dispute, see Certain
Legal Proceedings of this Prospectus.
Meanwhile, there are no restrictions or limitations on the ability of SPPC to supply power from
the Ilijan Plant to Meralco under its PSA with the latter.
Other Provisions
SPPC is required to maintain a U.S.$60 million performance bond in favor of PSALM. PSALM
remains responsible to KEILCO for the payment obligations of NPC under the Ilijan ECA.
While SPPC is granted the right to coordinate with KEILCO, on behalf of NPC, on matters
relating to management of the generation capacity of the Ilijan Power Plant, SPPC cannot
directly enforce the Ilijan ECA against KEILCO or NPC. Any claims for damages for breach,
or other entitlement, benefit or relief under the Ilijan IPPA Agreement arising from the breach
of KEILCO of its obligations under the Ilijan ECA must be claimed by SPPC against PSALM
through the ER Claim and the PSALM ER Claim mechanism.
Under the Ilijan IPPA Agreement, SPPC has the option to acquire the Ilijan Power Plant in
June 2022 without any additional payment by SPPC. SPPC may exercise the option to acquire
the Ilijan Power Plant prior to June 2022 under certain circumstances, such as changes in law or
non-performance by KEILCO of its obligations under the Ilijan ECA. In this case, the transfer
price will be the net present value of the sum of the agreed monthly payments remaining unpaid
at the date of termination of the Ilijan IPPA Agreement.
The Ilijan IPPA Agreement may be terminated by either SPPC or PSALM due to certain force
majeure events. In case of such termination, SPPC is entitled to receive from PSALM a
termination payment equal to the aggregate agreed monthly payments paid by SPPC up to the
date of termination less the aggregate capital recovery fees and fixed operating and
maintenance fee paid or payable by NPC/PSALM to KEILCO from the effective date of the Ilijan
IPPA Agreement up to the termination date of the Ilijan IPPA Agreement.
Power Offtakers
The entire capacity of the Ilijan Power Plant is contracted to Meralco under a long-term power
supply agreement up to 2019, which can be extended up to the end of the IPPA.
In the year ended December 31, 2013, 2014 and 2015, 86%, 91%, and 93%, respectively, of
the volume of power sold from the Ilijan Power Plant were derived from sales made under
offtake agreements. In the year ended December 31, 2013, 2014 and 2015, 14%, 9%, and 7%
of the volume of power sold from the Ilijan Power Plant, respectively, were derived from sales
made through the WESM.

101

Operations Review
The table below is a summary of operating statistics of the Ilijan Power Plant for the periods
indicated.
2013

Actual Energy Generated (GWh) . . . . . . . . . . . . . . . . . . . .


Electricity
sold (GWh): . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
. of which: bilateral offtake agreements . . . . . . . . . . . . . . . .
. of
. which: WESM sales . . . . . . . . . . . . . . . . . . . . . . . . . . .
..
Average
realized electricity prices(/MWh):
for electricity sold under bilateral offtake agreements . . . .
. .for electricity sold on WESM . . . . . . . . . . . . . . . . . . . . . . .
.Net
. Capacity Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Availability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.Reliability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average Net Dependable Capacity (MW) . . . . . . . . . . . . . .
.Net Heat Rate (Kilo-Joule/KWh) . . . . . . . . . . . . . . . . . . . . .
.......

Year ended December 31,


2014
2015

8,147
8,459
7,307
1,152

8,576
8,863
8,097
766

7,434
7,832
7,284
549

4,820
2,821
78
94
100
1,139
6,738

4,598
3,719
82
98
100
1,171
6,799

4,145
2,339
71
85
97
1,025
6,463

Fuel Supply
NPC is responsible for securing the natural gas and diesel fuel supply to the Ilijan Power Plant.
Under a fuel supply and management agreement between Shell Exploration B.V. and
Occidental Philippines, Inc., NPC supplies natural gas to the Ilijan Power Plant through a 480
km undersea pipeline from the Camago-Malampaya field in Palawan to the Shell Refinery in
Tabangao. From there, the natural gas is transported through a 16-in-diameter onshore pipeline
running 15 km to the power plant.
Operations and Maintenance
KEILCO is responsible for the operations and maintenance of the Ilijan Power Plant for 20 years
from June 2002. Under the Ilijan ECA, KEILCO is required to operate the Ilijan Power Plant
pursuant to certain operating criteria and guidelines, including output of 1,200 MW guaranteed
contracted capacity, base load operation, spinning reserve capability. Under the Ilijan ECA,
KEILCO is responsible, at its own cost, for the management, operation, maintenance, including
the supply of consumables and spare parts, and the repair of the Ilijan Power Plant.
The maintenance plan for the Ilijan Power Plant is agreed upon annually between SPPC, NPC,
PSALM, NGCP and KEILCO. The maintenance plan includes scheduled inspections and
overhauls, including scheduled periods of outage and details as to the personnel required to
complete each inspection. Planned outages for maintenance are scheduled in such a way that
only one unit is scheduled for shut down at any given time. The maintenance plan is established
with consideration given to the dispatch requirements of SPPC and recommendations of the
plant manufacturer. KEILCO is required to execute the maintenance plan in accordance with the
recommendations of the original equipment manufacturer and good utility practice. KEILCO
performs periodic maintenance activities on the generating units of the Ilijan Power Plant during
the course of the operations of the plant. The Ilijan ECA requires KEILCO to conduct an annual
test to check the capacity of the generating units of the Ilijan Power Plant.
Each of the generating units of the Ilijan Power Plant historically has been, and is expected to
continue to be, shut down for routine maintenance for approximately 26 days per calendar year.
SPPC also expects that KEILCO will shut down these units for more significant maintenance
and repair work for a total of 35 to 43 days in every fifth calendar year.

102

The table below sets forth actual planned outages of the Ilijan Power Plant for the periods
indicated.
2013

Block 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Block
2.........................................
.

Year ended December 31,


2014
2015

0 days
33 days

13 days
0 days

50 days
32 days

The maintenance of the Ilijan Power Plant is conducted once the minimum equivalent
operating hours of 12,000 hours has been met. The minimum equivalent operating hours were
not met and therefore there was no planned outage for the year 2013 for Block 1, and 2014 for
Block 2. The 50-day 2015 planned outage for Block 1 was due to two outages, 1) compressor
recovery work and adjusted major inspection of GT 1-2 on January 12 - February 15, 2016, and
2) Block 1 Maintenance outage on June 29 - July 29, 2016.
The table below sets forth unplanned outages of the Ilijan Power Plant for the periods indicated.

2013

Block 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Block 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year ended December 31,


2014
2015

1 days
1 days

2 days
1 days

16 days
4 days

Power Transmission
Power from the Ilijan Power Plant is transmitted through a 500 kV transmission line that
connects to the Luzon grid through the Ilijan-Dasmarinas line and Ilijan-Tayabas line. The
transmission line is owned by TransCo., and operated and maintained by NGCP.
LIMAY COGENERATION PLANT
Background
The Limay Cogeneration Plant is a 4 x 35 MW fuel-fired cogeneration power plant located in
Barangay Lamao, Limay, Bataan. Phase 1 (70 MW) of the Limay Cogeneration Plant
commenced commercial operations on May 6, 2013, while Phase 2 (70 MW) commenced
commercial operations on May 19, 2014. The engineering, procurement, and construction
contractors of the Limay Cogeneration Plant are Formosa Heavy Industries and True North
Manufacturing Services Corporation.
SMC Global Power, through its subsidiary SPI, acquired the Limay Cogeneration Plant from
Petron Corporation in September 2013. SPI acts as the IPP of the Limay Cogeneration Plant
while Petron Corporation remains responsible for the operation and maintenance of the plant.
Petron Corporation has the right of first refusal in case of sale of the Limay Cogeneration Plant.
Power Offtakers
The Limay Cogeneration Plant has a net power contracted capacity of 140 MW and a steam
generation capacity of 76 MW fully contracted to Petron Corporation under a 25-year PSA. The
output of the Limay Cogeneration Plant will supply the electricity and steam requirements of
the Limay refinery of Petron Corporation including the increase in demand from the new
Refinery Master Plan 2 (RMP-2).

103

Operations Review
The table below is a summary of operating statistics of the Limay Cogeneration Plant for the
periods indicated.
2013

Actual Energy Generated (GWh) . . . . . . . . . . . . . . . . . . . .


Electricity
sold (GWh): . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
of which: bilateral offtake agreements . . . . . . . . . . . . . . . .
. of which: WESM sales . . . . . . . . . . . . . . . . . . . . . . . . . . .
..
Average
realized electricity prices(/MWh):
for electricity sold under bilateral offtake agreement . . . . .
. .for electricity sold on WESM . . . . . . . . . . . . . . . . . . . . . . .
. . Capacity Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net
Availability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.Reliability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.Average Net Dependable Capacity (MW) . . . . . . . . . . . . . .
.

Year ended December 31,


2014
2015

104
104
104
-

537
537
537
-

527
527
527
-

10,755
66
92
98
48

10,473
49
87
99
75

13,772
43
89
98
100

Fuel Supply
The Limay Cogeneration Plant was designed to operate on coal and/or petcoke. Petron
Corporation is expected to supply petcoke, a byproduct of the RMP-2 operations. Currently, the
Limay Cogeneration Plant is using a mix of coal and petcoke from RMP-2.
Operations and Maintenance
Petron Corporation also serves as the operations and maintenance contractor for the Limay
Cogeneration Plant under a 25-year operations and maintenance contract. Under this contract,
Petron Corporation has the responsibility to operate and maintain the Limay Cogeneration Plant
at par with the industry standards.
ANGAT HYDROELECTRIC POWER PLANT (AHEPP)
Background
AHEPP is an operating hydroelectric power plant located at the Angat reservoir in San Lorenzo,
Norzagaray, Bulacan, approximately 58 km northeast of Metro Manila. Pursuant to EPIRA,
AHEPP was privatized through an asset purchase agreement between PSALM and K-Water. KWater assigned its rights in favor of Angat Hydro Power Corporation (AHC), a joint venture
between K-Water and PVEI, a subsidiary of SMC Global Power.
The project has a total electricity generating capacity of 218 MW, comprising four Main Units,
and three Auxiliary Units. The Main Units 1 and 2 were commissioned in 1967 and the Main
Units 3 and 4 in 1968. The Auxiliary Units 1 and 2 were commissioned in 1967 and the
Auxiliary Unit 3 in 1978. The Auxiliary Unit 3 was manufactured by Allis-Chalmer and Ebara and
all the other units were manufactured by Toshiba Corporation of Japan. All units are run by the
Francis-type turbines, which is the most commonly used model in hydroelectric power
generation.
Fuel Supply and Water Rights
The AHEPP utilizes water resources of the Angat reservoir. The Angat reservoir is 35 km long
and 3 km wide at its widest points, and has surface of 2,300 hectares and viable storage volume
of 850 million cubic meters. The water discharged by the project is used for the following two
purposes:

water resources from water discharged through Auxiliary Units and through the spillway
flows to the Ipo reservoir are used to supply 97.0% of the residential drinking water of
Metro Manila; and
104

water resources from water discharged through Main Units flows downstream to the
Bustos reservoir are utilized for irrigation purposes.

Water rights surrounding the project are co-owned and governed by the following governmentowned entities, pursuant to the Water Code of the Philippines, Angat Reservoir Operation Rules
issued and regulated by NWRB as implemented by a Memorandum of Agreement on the Angat
Water Protocol between MWSS, NIA, AHC, PSALM, NPC and NWRB:
MWSS, for domestic water supply to Metro Manila;
Provincial Government of Bulacan, for water supply in the Bulacan Province;
NIA, for irrigation diversion requirements; and
NPC, for power generation.
Power Offtakers
AHC sells majority of its generated capacity to the WESM at the prevalent spot price. The Main
Units are being operated as peaking units. The strategy for the Main Units is to allocate daily
water releases during peak hours. Auxiliary Units are being operated as base load units, as the
water requirement from MWSS is continuous throughout the day, thus eliminating any discrete
optionality to choose the hour of allocation.
AHC is currently exploring options to contract the capacity of its Auxiliary Units.
Operations and Maintenance
AHC undertakes the operation and maintenance of AHEPP in-house. The operations and
maintenance team consists of the incumbent local technical team who have been operating the
AHEPP, supported by technical experts seconded from K-Water.
AHC has entered into technical services agreements with each of K-Water and PVEI to ensure
that the appropriate level of technical and management support will be provided to support the
operation and maintenance requirements of AHC.
ALBAY POWER AND ENERGY CORP. (APEC)
On October 29, 2013, after the open and competitive bidding, SMC Global Power entered into a
concession agreement for the operation and maintenance of ALECO, which is the franchise
holder for the distribution of electricity in the province of Albay, Luzon. There is no transfer of the
franchise to operate the distribution system or the ownership of the distribution assets. At the
end of the concession period, the distribution system will be turned over back to ALECO. Under
the concession agreement, SMC Global Power would pay a concession fee consisting of
quarterly payments for the operating expenses of residual ALECO, and 50% of the net cash flow
if the net cash flow is positive within 5 years or earlier. SMC Global Power also paid for the
severance pay of ALECO employees dismissed as a result of the concession agreement.
SMC Global Power established APEC, and in January 2014, SMC Global Power assigned all of
its rights and obligations under the concession agreement to APEC. On February 26, 2014,
APEC assumed the role of SMC Global Power under the concession agreement.
SALES STRATEGY AND CUSTOMERS
SMC Global Power seeks to sell substantially all of the power generated by Sual and Ilijan
Power Plants and Limay Cogeneration Plant to customers pursuant to offtake agreements.
Currently, the entire capacity of the Ilijan Power Plant and Unit 1 of the Sual Power Plant are
contracted under long-term offtake agreements with Meralco and its affiliates, while the capacity
of Unit 2 of the Sual Power Plant is contracted to various distribution utilities, electric
105

cooperatives, and industrial customers under existing offtake agreements. The capacity of
Limay Cogeneration Plant is likewise fully contracted to Petron Corporation. These agreements
typically include Take-or-pay provisions whereby a customer is required to pay for a minimum
contracted amount of power, regardless of whether or not the customer takes delivery of the
entire amount, with the result that revenue from these offtake agreements is relatively stable
during the duration of the agreements. If the generation output available to the subsidiaries of
SMC Global Power from these plants exceeds the amount deliverable under their offtake
agreements, such subsidiaries of SMC Global Power offer the excess power for sale through
the WESM at the market clearing price. In the years ended December 31, 2013, 2014 and 2015,
approximately 85%, 89%, and 92%, respectively, of total consolidated sales revenue from SMC
Global Power were sold to customers pursuant to offtake agreements.
The power generation capacity of the San Roque Power Plant and the AHEPP at any given time
depends on the water levels in the reservoir and downstream irrigation requirements. As such,
these plants sell majority of their generated capacity to the WESM at the prevailing spot prices.
The San Roque Power Plant and the Main Units of the AHEPP are being operated as peaking
units. Available water is used to generate power during peak hours when prices are higher.
The Auxiliary Units of AHEPP are being operated as base load units, as the water requirement
from MWSS is continuous throughout the day, thus eliminating any discretion to choose the
hour of allocation. AHC is exploring options to contract the capacity of its Auxiliary Units.
In the years ended December 31, 2013, 2014 and 2015, approximately 82%, 88%, and 89%,
respectively, of consolidated volume of power sold by the Company are to customers pursuant
to offtake agreements. Sales to Meralco accounted for approximately 64%, 64%, and 62% of
the total consolidated sales volume of SMC Global Power, respectively, for the years ended
December 31, 2013, 2014 and 2015. Sales through the WESM accounted for approximately
18%, 12%, and 11% of SMC Global Powers total consolidated sales volume, respectively, for
the years ended December 31, 2013, 2014 and 2015. In 2015, 2% of consolidated sales
volume of SMC Global Power was for distribution customer sales through APEC.
EXPANSION PLANS
SMC Global Power intends to grow its power business by: (1) developing greenfield IPP
projects with strong and profitable fundamentals and (2) continuing its strategic acquisition of
power generation capacities or projects that may be bid out or offered by the government. SMC
Global Power identifies potential investments by analyzing the demand for power and powerrelated services. Factors such as Philippine GDP and population growth, customer profile and
mix, accessibility to the grids, and industrial expansion are considered. SMC Global Power also
looks at commercial viability, potential costs (whether for development or acquisition) and
competitive costs, as well as land acquisition and environmental protection issues and the
impact of environmental protection requirements on overall profitability of the project, and the
availability of Government incentives for a particular project.
Power Generation Capacity
Greenfield Power Projects
SMC Global Power is currently expanding its power portfolio nationwide through greenfield
power projects over the next few years, depending on market demand, including the following
two coal-fired circulating fluidized bed (CFB) power projects which are under construction:
The following timeline sets forth key project milestones for the Davao Greenfield Power Plant:
January 2013 . . . . . . . . . . . . . . . . . . . . . . .

Executed EPC Contract with Formosa Heavy Industries,


for the construction of the Limay and Davao Greenfield
Power Plants

106

June 2013 . . . . . . . . . . . . . . . . . . . . . . . . .

Obtained Environmental Compliance Certificate (ECC)


and Pioneer Status from Board of Investments (tax
holiday)

July 2013 . . . . . . . . . . . . . . . . . . . . . . . . . .

Obtained
Interim
Customs
Accreditation
Registration from Bureau of Customs

August 2013 . . . . . . . . . . . . . . . . . . . . . . . .

Site hand over

September 2013 . . . . . . . . . . . . . . . . . . . .

Obtained Certificate of Authority to Import Capital


Equipment, Spare Parts and Accessories from Board of
Investments

November 2013 . . . . . . . . . . . . . . . . . . . . .

Obtained zoning and location clearance from Municipality


of Malita

2014 to November 2016 . . . . . . . . . . . . . .

Construction and engineering of Unit 1 and Unit 2, and


signing of offtake agreements

July 2016 . . . . . . . . . . . . . . . . . . . . . . . . .

Target
Unit 1

November 2016 . . . . .. . . . . . . . . . . . . . . .

Target COD for Unit 2

Commercial

Operations

Date

(COD)

and

for

The following timeline sets forth key project milestones for the Limay Greenfield Power Plant
(Phase 1):
January 2013 . . . . . . . . . . . . . . . . . . . . . . .

Executed EPC Contract with Formosa Heavy Industries,


for the construction of the Limay and Davao Greenfield
Power Plants.

July 2013 . . . . . . . . . . . . . . . . . . . . . . . . . .

Obtained
Interim
Customs
Accreditation
Registration from Bureau of Customs

September 2013 . . . . . . . . . . . . . . . . . . . .

Obtained ECC and Pioneer Status from Board of


Investments (tax holiday)

January 2014 . . . . . . . . . . . . . . . . . . . . . . .

Site hand over, submitted application for the Certificate


of Authority to Import Capital Equipment, Spare Parts
and Accessories to Board of Investments and pending
application and negotiations with the Municipality of
Limay with respect to zoning and location clearance

2014 to 2017. . . . . . . . . . . . . . . . . . . . . . . .

Construction and engineering of Unit 1 and Unit 2, and


Signing of offtake agreements

October 2016. . . . . . . . . . . . . . . . . . . . . . .

Target COD for Unit 1

January 2017 . . . . . . . . . . . . . . . . . . . . . .

Target COD for Unit 2

and

The following timeline sets forth key project milestones for the Limay Greenfield Power Plant
(Phase 2):
December 2017. . . . . . . . . . . . . . . . . . . . .

Target COD for Unit 3

February 2019 . . . . . . . . . . . . . . . . . . . . .

Target COD for Unit 4

107

The table below summarizes the information of the greenfield power plants of SMC Global
Power.
Plant Name
(Subsidiary)
Davao
Greenfield
Power Plant
(San Miguel
Consolidated
Power
Corporation)

Proposed
Capacity
2 x 150 MW

Limay Greenfield
Power Plant
(Phase 1)
(SMC
Consolidated
Power
Corporation)

2 x 150 MW

Barangay
Lamao, Limay,
Bataan

Limay Greenfield
Power Plant
(Phase 2)
(Limay Premiere
Power Corp.)

2 x 150 MW

Barangay
Lamao, Limay,
Bataan

Location
Barangay
Culaman,
Malita, Davao
del Sur

Target
Commercial
Operation Date
July 2016 for
Unit 1,
November
2016 for Unit 2

Operator
Safetech
Power
Services
Corp.

Fuel Supply
Regional Coal
Suppliers/SMC
Global power
coal mines
(when
operational)

Offtaker
Industrial
customer,
ECs, DUs(1)

October 2016
for Unit 1,
January 2017
for Unit 2

Mantech
Power
Dynamics
Services
Inc.

Regional Coal
Suppliers/SMC
Global power
coal mines
(when
operational)

Industrial
customer,
ECs,
DUs(1)

December
2017 for Unit
3, February
2019 for Unit
4

Mantech
Power
Dynamics
Services
Inc.

Regional Coal
Suppliers/SMC
Global power
coal mines
(when
operational)

Industrial
customer,
ECs,
DUs(1)

(1) Electric Cooperatives (EC); Distribution Utilities (DU).

SMC Global Power plans to employ CFB technology for each of the planned greenfield power
projects. Coal-fired power plants generate power by burning coal, a process that generates
carbon dioxide, sulfur dioxide and other pollutants. CFB technology is a type of technology
employed to transform coal into a fuel source that is relatively low in such pollutant emissions
compared with other coal-fired power plants. These low emissions are made possible by
processes that are not used in non-CFB coal-fired power plants, such as chemically washing
minerals and impurities from the coal, gasification, treating the flue gases with steam to remove
sulfur dioxide, carbon capture and storage technologies to capture the carbon dioxide from
the flue gas and dewatering lower rank coals (brown coals) to improve the calorific value,
thereby improving the efficiency of the conversion into electricity. CFB technology permits
relatively low emissions of carbon dioxide, sulfur dioxide and other pollutants. CFB technology
also uses a low calorific value coal fuel, comparable with the type expected to be sourced from
the coal mining assets of SMC Global Power in Mindanao.
In selecting CFB technology for these planned greenfield power projects, SMC Global Power is
seeking to incur cost savings via: 1) third party bulk order discounts for coal fuel supply, 2) interoperability, 3) reduced training costs for operators, 4) spare parts exchange, 5 ) common coal
handling facilities, among other savings initiatives.
Acquisition of Existing Power Generation Capacity
SMC Global Power intends to continue its strategic acquisitions of existing power generation
capacity by bidding for selected Government-owned power generation plants that are currently
scheduled for privatization under the IPPA framework or pursuant to asset sales.

108

Retail Electricity Supply


SMC Global Power is pursuing downstream vertical integration by capitalizing on changes in
the Philippine regulatory structure to expand its sales of power to a broader range of customers,
including retail customers. In August 2011, as part of the reorganization of the power-related
assets of San Miguel Corporation, SMC Global Power acquired from San Miguel Corporation a
100% equity interest in SMELC, which holds an RES license from the ERC. As of December
31, 2015, SMELC supplies an equivalent of 31.8 MW to various facilities of San Miguel
Corporation and other Contestable Customers.
Coal Investments
In accordance with the strategy of the Company to pursue vertical integration of its power
business, SMC Global Power, through SMEC and its subsidiaries, Bonanza Energy, Daguma
Agro and Sultan Energy has acquired coal exploration, production and development rights over
approximately 17,000 hectares of land in Mindanao, which may provide a source of coal fuel
supply for its planned and contemplated greenfield power projects. Such assets are in the
exploratory stage and no results as to their actual viabilities were available as of December 31,
2015. The mines of SMC Global Power are envisioned to provide fuel for the two new greenfield
projects under construction. The table below sets forth certain information regarding these
assets.
Subsidiary

Coal Operating Contract


(COC)
COC for exploration awarded
in May 2005, converted to
COC for development and
production in December 2009

Description of Asset

Mining Site

Bonanza Energy

Coal operating contact (COC)


with the DOE covering eight
blocks with a total area of
approximately 8,000 hectares

Lake Sebum South


Cotabato and
Maitum,
Saranggani
Province

Daguma Agro

COC with the DOE covering


two coal blocks with a total area
of approximately 2,000
hectares.

Lake Sebu, South


Cotabato

COC for exploration awarded


in November 2002; converted
to COC for development and
production in March 2008

Sultan Energy

COC with the DOE covering


seven blocks with a total area
of 7,000 hectares

Lake Sebu, South


Cotabato and
Bagumbayan,
Sultan Kudarat

COC for exploration awarded


in February 2005; converted to
COC for development and
production in February 2009

Each of the COCs has a term of 10 years from the conversion date of the COC for development
and production. The initial 10-year term of each COC may be extended for another 10-year
period, and thereafter for a series of three-year periods not to exceed 12 years, in each case
subject to agreement between the parties. Total mining rights recognized from the acquisitions
of Sultan Energy, Daguma Agro and Bonanza Energy amounted to 1,720.0 million.
Daguma Agro
Daguma Agro, a coal mining company with coal property covered by COC No. 126 issued by
the DOE, dated November 19, 2002, located in Barangay Ned, Lake Sebu, South Cotabato
consisting of two (2) coal blocks with a total area of two thousand 2,000 hectares, more or less,
has in-situ coal resources (measured plus indicative coal resources) of about 94 million metric
tons as of December 31, 2015 based on exploratory drilling and additional in-fill drilling
conducted by Daguma Agro.
Sultan Energy
Sultan Energy, has a coal mining property and right over an aggregate area of 7,000 hectares,
more or less composed of seven (7) coal blocks located in Lake Sebu, South Cotabato and
Sen. Ninoy Aquino, Sultan Kudarat covered by COC No. 134 issued by the DOE dated
February 23, 2005. As of December 31, 2015, COC No. 134 has in-situ coal resources
(measured plus indicative coal resources) of about 35 million metric tons based on exploratory
109

drilling and confirmatory drilling conducted by Sultan Energy.


Bonanza Energy
Bonanza Energy, a mining company with coal property covered by COC No. 138 issued by
the DOE dated May 26, 2005. COC No. 138 is located in Maitum, Sarangani Province and
Barangay Ned, Lake Sebu, South Cotabato consisting of eight (8) coal blocks with a total area
of 8,000 hectares, more or less, has in-situ coal resources (measured plus indicative coal
resources) of about 24 million metric tons as of December 31, 2015 based on initial exploratory
drilling conducted by SMEC geologists in Maitum, Sarangani. The COCs met the
contractual/legal criterion and qualified as intangible assets under PFRS 3.
The DOE approved the conversion of the COC for Exploration to COC for Development
and Production of Daguma Agro, Sultan Energy and Bonanza Energy, respectively, effective
on the following dates:
Subsidiary

(1)

COC No.

Effective Date

Daguma Agro
Sultan Energy

126
134

November 19, 2008


February 23, 2009

10 years
10 years

Bonanza Energy

138

May 26, 2009

10 years

Term

(1) The term for Daguma Agro is followed by another 10-year extension, and thereafter, renewable for a series of 3-year periods
not exceeding 12 years under such terms and conditions as may be agreed upon with the DOE. The term for Sultan Energy and
Bonanza Energy is renewable for a series of 3-year periods not exceeding 12 years under such terms and conditions as may be
agreed upon with the DOE.

CUSTOMERS
SMC Global Power, through its subsidiaries, sells power, through power supply agreements,
either directly to customers (distribution utilities, electric cooperatives and industrial
customers) or through the WESM.
Year ended December 31,
Customers

2013

2014

2015

Volume Sold
Revenue
(GWh)
(in millions )

Volume Sold
Revenue
(GWh)
(in millions )

Volume Sold
Revenue
(GWh)
(in millions )

Meralco

10,367

46,953

10,801

47,234

10,317

40,889

WESM

2,847

10,771

2,110

9,623

1,844

6,217

13,214

57,724

12,911

56,857

12,161

47,106

2,948

16,320

4,090

27,437

4,397

30,401

16,163

74,044

17,001

84,294

16,558

77,507

Total Major Customers


Others(1)
Total Sales
(1)

Includes Non-MERALCO DUs, ECs, Directly Connected Customers, Contestable Customers, Sales to Distribution
Customers, and Inter-company sales.

COMPETITION
SMC Global Power and its subsidiaries form one of the largest power companies in the
Philippines, with a 17% share of the power supply of the national grid, and 22% of the Luzon
grid in each case as of December 31, 2015, based on ERC Resolution No. 03, Series of 2015.
Its main competitors are the Lopez Group and the Aboitiz Group. The Lopez Group holds
significant interests in First Gen Corporation and Energy Development Corporation, while the
Aboitiz Group holds interests in Aboitiz Power Corporation and Hedcor, Inc., among others.
With the Government committed to privatizing the majority of PSALM-owned power
generation facilities and the establishment of WESM, the generation facilities of SMC Global
Power will face competition from other power generation plants that supply the grid during the
privatization phase. Multi-nationals that currently operate in the Philippines and could potentially
compete against SMC Global Power in the privatization process include KEPCO, Marubeni
Corporation, Tokyo Electric Power Corporation, AES Corporation and Sumitomo, among others.
Several of these competitors have greater financial resources, and have more extensive
110

operational experience and other capabilities than SMC Global Power, giving them the potential
ability to respond to operational, technological, financial and other challenges more quickly than
SMC Global Power. SMC Global Power will face competition in both the development of new
power generation facilities and the acquisition of existing power plants, as well as competition
for financing for these activities. The performance of the Philippine economy and the potential
for a shortfall in the Philippines energy supply have attracted many potential competitors,
including multinational development groups and equipment suppliers, to explore opportunities in
the development of electric power generation projects within the Philippines. Accordingly,
competition for and from new power projects may increase in line with the long-term economic
growth in the Philippines.
COMPLIANCE WITH ENVIRONMENTAL LAWS
Power operations are subject to extensive, evolving and increasingly stringent safety, health
and environmental laws and regulations. These laws and regulations include the Philippine
Clean Air Act of 1999 (Clean Air Act), the Philippine Clean Water Act of 2004 (Clean Water
Act), Toxic Substances and Hazardous and Nuclear Waste Control Act of 1990, and the
Department of Labor and Employment Occupational Safety and Health Standard of 1989, as
amended. Such legislation addresses, among other things, air emissions, wastewater
discharges as well as the generation, handling, storage, transportation, treatment and disposal
of toxic or hazardous chemicals, materials and waste. It also regulates workplace
conditions within power plants and employee exposure to hazardous substances. The
Occupational Safety and Health Standard, meanwhile, was formulated to safeguard the
workers social and economic well-being as well as their physical safety and health.
SMC Global Power complies, and it believes that the IPPs for each of the IPPA Power
Plants managed by SMC Global Power, through its subsidiaries, comply, in all material
respects with all applicable safety, health and environmental laws and regulations.
The Sual Power Plant received its Environmental and Management System Certificate (ISO
14001) in 2004, its Occupational Standard on Health Safety Certificate (ISO 18001) in 2007 and
its Quality Management System Certificate (ISO 9001) in 2008.
For each of its greenfield power projects, SMC Global Power will comply with all applicable
safety, health and environmental laws and regulations, including securing the necessary ECC in
accordance with Philippine law.
In addition, coal mining in the Philippines is subject to environmental, health and safety laws,
forestry laws and other legal requirements. These laws govern the discharge of substances into
the air and water, the management and disposal of hazardous substances and wastes, site
clean-up, groundwater quality and availability, plant and wildlife protection, reclamation and
rehabilitation of mining properties after mining is completed and the restriction of open-pit
mining activities in conserved forest areas.
Notwithstanding the foregoing, the discharge of chemicals, other hazardous substances and
pollutants into the air, soil or water by the power plants owned or managed by SMC Global
Power or the coal mines of SMC Global Power may give rise to liabilities to the Government
and to local Government units where such facilities are located, or to third parties. In addition,
SMC Global Power may be required to incur costs to remedy the damage caused by such
discharges or pay fines or other penalties for non-compliance.
Further, the adoption of new safety, health and environmental laws and regulations, new
interpretations of existing laws, increased governmental enforcement of environmental laws
or other developments in the future may require that SMC Global Power make additional
capital expenditures or incur additional operating expenses in order to maintain the operations
of its generating facilities at their current level, curtail power generation or take other actions
that could have a material adverse effect on the financial condition, results of operations and
cash flow of the Company.
111

EMPLOYEES
As of December 31, 2015, SMC Global Power has 84 employees. All employees are based in
Philippines.
Divisions/
Business Units
Billing and Settlement
Comptrollership
Energy Sourcing and Trading
Finance Services
Financial Planning & Analysis
HR & Administration
Internal Audit
Legal
Office of the General Manager
Plant Operations
Risk Management & Procurement
Sales & Marketing
Tax Compliance
Treasury
Utility Economics
TOTAL

Number of Employees
Executives

Managers

Supervisors

Rank & File

TOTAL

0
1
0
0
0
0
0
0
1
0
0
0
0
1
0
3

1
0
1
1
2
1
1
7
1
1
0
1
0
0
1
18

0
0
1
0
0
0
0
0
1
0
0
1
0
1
0
4

8
4
10
10
2
4
1
2
2
2
5
3
1
3
2
59

9
5
12
11
4
5
2
9
5
3
5
5
1
5
3
84

Employees of SMC Global Power are not members of any labor union since 2008. The
Company has not experienced any work stoppages and considers its relationship with its
employees to be good. In addition to the statutory benefits, SMC Global Power initiates
benefits to provide for the increased security of its employees in the following areas:
healthcare, leaves, miscellaneous benefits, loans and financial assistance applicable to a
variety of uses, retirement benefits and survivor security and death benefits.
With the ensuing 12 months, SMC Global Power may require additional hiring of employees to
support its business expansion, the number of which cannot be determined.
RECENT DEVELOPMENTS
On April 26, 2016, Mariveles Power Generation Corporation (MPGC), a wholly owned
subsidiary of SMC Global Power, signed a PSA with Meralco for the delivery of up to 528 MW of
electrical output from its 600 MW circulating fluidized bed coal-fired power generating facility to
be constructed and operated in Mariveles, Bataan. The construction of said power plant is
projected to be completed by 2019.
On April 26, 2016, Central Luzon Premiere Power Corp., a wholly owned subsidiary of SMC
Global Power, signed a PSA with Meralco for the delivery of up to 528 MW of electrical output.
Central Luzon Premiere Power Corp. intends to construct, own and operate a 600 MW
circulating fluidized bed coal-fired power generating facility in Pagbilao, Quezon. The
construction of said power plant is projected to be completed by 2019.
Last April 29, 2016, MPGC and Central Luzon Premiere Power Corp., together with Meralco,
filed their respective applications with the ERC for the approval of the aforementioned PSAs.
On June 16, 2016, Meralco Powergen Corporation (MGen), a subsidiary of Meralco, and
Zygnet Prime Holdings, Inc. (Zygnet) subscribed to 2,500 and 102 common shares of MPGC,
respectively. As a result, SMC Global Power holds 49% of the outstanding capital stock of
MPGC while MGen holds 49% and Zygnet 2%. MPGC shall develop, construct, finance, own,
operate and maintain a 4x150 MW circulating fluidized bed coal-fired power plant and associated
facilities in Mariveles, Bataan.

112

TRANSACTIONS WITH RELATED PARTIES


The Group, in the normal course of business, purchases products and services from and sells
products and renders services to related parties. Transactions with related parties are made at
normal market prices and terms. An assessment is undertaken at each financial year by
examining the financial position of the related party and the market in which the related party
operates.
The following are the transactions with related parties and the outstanding balances:

Year
2015
2014

SMC

Revenue Purchases
from
from
Related
Related
Parties
Parties
1,177
267

Amounts
Owed by
Related
Parties
0
11

Entities Under
Common
Control

2015
2014

8,818
7,815

2,835
2,208

1,462
853

Associate

2015
2014

958
879

93
78

2015
2014

256
-

Associates of
Entities under
Common
Control

2015
2014

735
-

119
-

79
-

2015
2014

Others

2015
2014

7
-

321
-

2
-

2015

10,519

4,452

1,892

2014

8,693

2,476

941

Amounts
Owed to
Related
Parties
Terms
107 On demand
18 or 30 days;
non-interest
bearing
359 On demand
418 or 30 days;
non-interest
bearing
28 30 days;
28 non-interest
bearing
- 8 years;
- interestbearing
0 30 days;
- non-interest
bearing
3,103 10 years;
3,451 interestbearing
160 On demand
- or 30 days;
non-interest
bearing
3,757

Conditions
Unsecured;
no
impairment
Unsecured;
no
impairment
Unsecured;
no
impairment
Unsecured;
no
impairment
Unsecured;
no
impairment
Secured

Unsecured;
no
impairment

3,915

* All peso amounts in the table above are in millions.


(a)

Amounts owed by related parties consist of trade and other receivables and security
deposits (Note 7).

(b)

Amounts owed to related parties consist of trade and non-trade payables, management
fees, purchases of fuel, reimbursement of expenses, rent, insurance and services rendered
by related parties.

(c)

Amounts owed by an associate consists of interest bearing loan granted to OEDC included
as part of Other noncurrent assets - net account in the consolidated statements of
financial position.

113

(d)

The amount owed to associate of an entity under common control consists of interest
bearing loan obtained from Bank of Commerce included as part of Long-term debt
account in the consolidated statements of financial position.

(e)

The compensation of key management personnel of the Group amounted to 37.5 million
and 32.6 million for the years ended December 31, 2015 and 2014, respectively.

(f)

SMC offers shares of stock to employees of SMC and its subsidiaries under the ESPP.
Under the ESPP, all permanent Philippine-based employees of SMC and its subsidiaries
who have been employed for a continuous period of one year prior to the subscription
period will be allowed to subscribe at a price equal to weighted average daily closing prices
for three months prior to the offer period less 15% discount. A participating employee may
acquire at least 100 shares of stock up to a maximum of 20,000 shares, subject to certain
conditions, through payroll deductions (Note 3).

(g)

The ESPP requires the subscribed shares and stock dividends accruing thereto to be
pledged to SMC until the subscription is fully-paid. The right to subscribe under the ESPP
cannot be assigned or transferred. A participant may sell his shares after the second year
from exercise date. The ESPP also allows subsequent withdrawal and cancellation of
participants subscriptions under certain terms and conditions.

(h)

As of December 31, 2015 and 2014, there are no expenses related to ESPP.

114

DESCRIPTION OF PROPERTIES
SMC Global Power owns the Limay Cogeneration Plant, Davao Greenfield Power Plant and
Limay Greenfield Power Plant. However, SMC Global Power does not own the IPPA plants
until it elects a transfer of ownership at the expiry of the IPPA Agreement. The principal office
address of SMC Global Power is located at 155 EDSA, Wack-Wack, Mandaluyong City,
Philippines and it has another office located at 7 St. Francis Street Mandaluyong City,
Philippines. These premises are leased by SMC Global Power from San Miguel Properties,
Inc., a subsidiary of San Miguel Corporation.

115

CERTAIN LEGAL PROCEEDINGS


Petition to stop the imposition of the increase in generation charge
SMC Global Power and other generation companies became parties to a petition filed in the
Supreme Court by special interest groups which sought to stop the imposition of the increase
in generation charge of Meralco for the November 2013 billing month. The Supreme Court
issued a Temporary Restraining Order (TRO) ordering Meralco not to collect, and the
generators not to demand payment, for the increase in generation charge for the November
2013 billing month. The TRO was originally for 60 days, and was extended for another 60 days.
The case is pending resolution by the Supreme Court.
ERC order voiding WESM prices
In the meantime, on March 3, 2014, an ERC Order was issued declaring the prices in the WESM
for the November and December 2013 billing months, as null and void, and ordered the PEMC,
the operator of the WESM, to calculate and issue adjustment bills using recalculated prices.
SMC Global Power filed a request with the ERC for the reconsideration of the ERC Order. Other
generators also requested the Supreme Court to stop the implementation of the ERC Order. The
request is pending resolution by the ERC.
The ERC Order has no impact on the financials of SMC Global Power, since the financial
information reported in this Prospectus already took into account the minimum revenues and
margins based on the adjusted bills from PEMC. The payments for energy under bilateral
contracts were not affected and only the sales of SMC Global Power in the WESM are covered
by the adjusted bill.
Ilijan IPPA Agreement Dispute
SPPC and PSALM are parties to the Ilijan IPPA Agreement covering the appointment of SPPC
as the IPP Administrator of the Ilijan Power Plant.
SPPC and PSALM have an ongoing dispute arising from differing interpretations of certain
provisions related to generation payments under the Ilijan IPPA Agreement. As a result of such
dispute, the parties have arrived at different computations regarding the subject payments. In a
letter dated August 6, 2015, PSALM has demanded payment of the difference between the
generation payments calculated based on its interpretation and the amount which has already
been paid by SPPC, plus interest, covering the period December 26, 2012 to April 25, 2015.
On August 12, 2015, SPPC initiated a dispute resolution process with PSALM as provided under
the terms of the Ilijan IPPA Agreement, while continuing to maintain that it has fully paid all of its
obligations to PSALM. Notwithstanding the bona fide dispute, PSALM issued a notice
terminating the Ilijan IPPA Agreement on September 4, 2015. On the same day, PSALM also
called on the Performance Bond posted by SPPC pursuant the Ilijan IPPA Agreement.
On September 8, 2015, SPPC filed a Complaint with the Regional Trial Court of Mandaluyong
City. In its Complaint, SPPC requested the Court that its interpretation of the relevant provisions
of the Ilijan IPPA Agreement be upheld. The Complaint also asked that a 72-hour Temporary
Restraining Order (TRO) be issued against PSALM for illegally terminating the Ilijan IPPA
Agreement and drawing on the Performance Bond. On even date, the Court issued a 72-hour
TRO which prohibited PSALM from treating SPPC as being in Administrator Default and from
performing other acts that would change the status quo ante between the parties before PSALM
issued the termination notice and drew on the Performance Bond. The TRO was extended for
until September 28, 2015.

116

On September 28, 2015, the Court issued an Order granting a Preliminary Injunction enjoining
PSALM from proceeding with the termination of the Ilijan IPPA Agreement while the main case is
pending.
On October 22, 2015, the Court also issued an Order granting the Motion for Intervention and
Motion to Admit Complaint-in-intervention by Meralco. Currently pending for resolution of the
Court are: 1) PSALMs Motion for Reconsideration of the Order granting the Preliminary
Injunction; and 2) PSALMs Motion to Dismiss. Preliminary conferences among the parties were
scheduled on February 18, 2016, April 14, 2016 and June 16, 2016 were reset due to the
pending motions. On June 16, 2016, the preliminary conference was reset to September 1,
2016 as the court has yet to resolve the pending motions.
Meanwhile, there are no restrictions or limitations on the ability of SPPC to supply power from
the Ilijan Power Plant to Meralco under its Power Supply Agreement with the latter.
By virtue of the Preliminary Injunction issued by the Court, SPPC continues to be the IPP
Administrator for the Ilijan Power Plant.
Complaints for estafa and corruption against PSALM officers
On September 29, 2015, SPPC filed criminal complaints for estafa and violation of Section 3(e)
of Republic Act No. 3019, otherwise known as the Anti-Graft and Corrupt Practices Act (RA
3019), before the Department of Justice (DOJ), against certain officers of PSALM, in
connection with the termination of SPPCs IPPA Administration Agreement. The complaints
allege that SPPCs IPPA Administration Agreement was entered into and performed by PSALM
with manifest partiality and evident bad faith. Further, it was alleged that PSALM fraudulently
misrepresented its entitlement to draw on the Performance Bond posted by SPPC, resulting in
actual injury to SPPC in the amount of U.S.$60 million. The DOJ summoned the parties to
appear before the court on May 6, 2016. PSALM officers requested for extension to submit a
counter-affidavit until May 25, 2016. During the preliminary hearing on May 25, 2016, PSALM
officers requested for extension to submit a counter-affidavit until June 14, 2016. Thus, hearing
was reset to June 14, 2016 for the submission of the counter-affidavit of the officers of PSALM.
On June 14, 2016, PSALM officers requested until June 20, 2016 to submit their counteraffidavit. On June 21, 2016, SPPC submitted a manifestation stating that it will no longer submit
a reply-affidavit and is submitting the case for resolution by the DOJ.
Complaints for plunder and corruption against PSALM, TPEC, and TeaM Energy
On October 21, 2015, SMEC filed criminal complaints for plunder and violation of Section 3(e)
and 3(f) of RA 3019 before the DOJ against certain officers of PSALM, TPEC and TeaM Energy
in connection with the illegal grant of the so-called excess capacity of the Sual Power Station in
favor of TPEC pursuant to the Memorandum of Agreement among PSALM, TPEC and TeaM
Energy, enabling it to receive a certain amount at the expense of the Government and SMEC.
The DOJ summoned the parties to appear before the court on May 6, 2016. PSALM, TPEC and
TeaM Energy are scheduled to submit a counter-affidavit on May 25, 2016. During the
preliminary hearing on May 25, 2016, TPEC and TeaM submitted their counter-affidavit and
PSALM officers required for an extension to submit a counter-affidavit until June 14, 2016.
Thus, hearing was reset to June 14, 2016 for the submission of the counter-affidavit of the
officers of PSALM and the reply-affidavit of SMEC to the counter-affidavit submitted by TPEC
and TeaM Energy. On June 14, 2016, PSALM officers submitted their reply-affidavit. On June
21, 2016, SMEC submitted a manifestation stating that it will no longer submit a reply-affidavit
and is submitting the case for resolution by the DOJ.
In connection with the foregoing, on June 17, 2016, SMEC filed with the RTC Pasig a civil
complaint for consignation against PSALM arising from PSALMs refusal to accept SMECs
remittances corresponding to the proceeds of the sale on the WESM of electricity generated
from capacity in excess of the 1000 MW of the Sual Power Station (Sale from the Excess
Capacity). With the filing of the complaint, SMEC also consigned with the RTC Pasig, the
117

amount of Php 161,400,699.40, corresponding to the proceeds of the Sale of the Excess
Capacity for the billing periods 26 December 2015 to 25 April 2016.
Refund of system loss charge
In 2008, MERALCO filed a petition for dispute resolution against PEMC, Transco, NPC and
PSALM seeking, among others, the refund of the transmission line loss components of the line
rentals associated with PSALM/NPC bilateral transactions from the start of the WESM
operations and Transition Supply Contract (TSC) implemented in 2006. In this case, the ERC
concluded that Meralco was being charged twice considering that it already paid line rental to the
WESM beginning June 2006. Hence, the ERC ordered PSALM/NPC to refund Meralco the
2.98% system loss charge embedded in the NPC-Time-of-Use (NPC TOU) rate (Meralco vs.
PSALM, NPC, Transco).
On March 4, 2013, the ERC issued a subsequent order directing Meralco (i) to collect this
system loss charge from the Successor Generating Companies (SGCs), which supplied the
Meralco-NPC TSC and charged the NPC TOU rates, and (ii) to file a petition for dispute
resolution against the SGCs. PSALM appealed the ERCs March 4, 2013 order to the Court of
Appeals.
In compliance with the ERCs March 4, 2013 order, Meralco filed a petition for dispute resolution
with the ERC against all SGCs which supplied portions of the TSC (including SMEC and SPPC).
On September 20, 2013, SMEC and SPPC jointly with the other SGCs filed a Motion to Dismiss
before the ERC, which to this day remains unresolved by the ERC.
Validity of Concession Agreement with ALECO
The dispute arose from a Complaint for Injunction with a prayer for the issuance of writ of
preliminary prohibitory injunction, writ of preliminary mandatory injunction, temporary mandatory
order and temporary restraining order filed by a group of individuals headed by Jaime Chua (the
Appellant), the alleged president of Albay Electric Cooperative, Inc. (ALECO), on December
16, 2014, enjoining the implementation of the 25-year Concession Agreement with ALECO dated
October 29, 2013, with SMC Global Power (the Concession Agreement). The foregoing
Complaint also questioned the validity of the Concession Agreement due to alleged oppressive
and disadvantageous provisions therein. On September 29, 2015, the trial court upheld the
validity of the Concession Agreement and dismissed the Complaint. As a result, the Appellants
filed an appeal with the Court of Appeals. To date, the case is still pending with the appellate
court.
Other than those mentioned above, there are no material pending legal proceedings to which
SMC Global Power or any of its subsidiaries and affiliates is a party or to which any of their
material assets are subject.

118

MARKET PRICE AND DIVIDENDS ON COMMON EQUITY AND


RELATED STOCKHOLDER MATTERS
Market Information
The Company has an authorized capital stock of 2,000,000,000.00 comprised of
2,000,000,000 common shares with par value of 1.00 per common share. As of the date of
this Prospectus, the Company has issued and outstanding 1,250,003,500 common shares.
The common shares of the Company are neither traded in any market, nor subject to
outstanding warrants to purchase, or securities convertible into common shares of the
Company.
Stockholders
As of December 31, 2015, the Company has 8 stockholders, 7 of whom are individuals with at
least five hundred shares each. The following sets out the shareholdings of the
aforementioned 8 stockholders and the approximate percentages of their respective
shareholdings to the total outstanding common stocks of SMC Global Power:
Class of
Securities

Number of
Shares

% of O/S
Shares

San Miguel Corporation

Common

1,250,000,000

100.00%

Ramon S. Ang

Common

500

0.00%

Ferdinand K. Constantino

Common

500

0.00%

Alan T. Ortiz

Common

500

0.00%

Aurora T. Calderon

Common

500

0.00%

Virgilio S. Jacinto

Common

500

0.00%

Jack G. Arroyo, Jr.

Common

500

0.00%

Consuelo M. Ynares-Santiago

Common

500

0.00%

Name of Stockholder

Dividend Policy
The Company and its subsidiaries are allowed under Philippine laws to declare dividends,
subject to certain requirements. These requirements include, for example, that the Board is
authorized to declare dividends only from its unrestricted retained earnings. Dividends may be
payable in cash, shares or property, or a combination of the three, as the Board shall determine.
A cash dividend declaration does not require any further approval from shareholders. The
declaration of stock dividends is subject to the approval of shareholders holding at least twothirds of the outstanding capital stock of the Company. The Board may not declare dividends
which will impair its capital.

119

The Company and its subsidiaries declare dividends as determined by the Board, taking into
consideration factors such as the implementation of business plans, debt service requirements,
operating expenses, budgets, funding for new investments and acquisitions and appropriate
reserves and working capital.
Historically, the Board of Directors of the Company has approved the declaration and payment of
the following dividends from SMC Global Power to its shareholders in the past three (3) years,
as follows:
2015
Date of Declaration
March 25, 2015
July 2, 2015
November 5, 2015

Amount ()
1,500,000,000
1,500,000,000
1,500,000,000

Type of Dividend
Cash
Cash
Cash

Payment Date
March 31, 2015
July 9, 2015
November 10, 2015

2014
Date of Declaration
March 25, 2014
June 3, 2014
August 19, 2014
November 4, 2014

Amount ()
1,500,000,000
3,500,000,000
2,500,000,000
2,500,000,000

Type of Dividend
Cash
Cash
Cash
Cash

Payment Date
April 8, 2014
June 10, 2014
August 29, 2014
November 11, 2014

2013
Date of Declaration
February 19, 2013
May 3, 2013
August 13, 2013
November 29, 2013

Amount ()
1,000,000,000
1,000,000,000
1,000,000,000
1,500,000,000

Type of Dividend
Cash
Cash
Cash
Cash

Payment Date
February 28, 2013
May 15, 2013
August 15, 2013
December 5, 2013

Recent Sales of Unregistered or Exempt Securities, Including Recent Issuance of


Securities Constituting an Exempt Transaction
SMC Global Power has not sold unregistered or exempt securities nor has it issued securities
constituting an exempt transaction within the past three (3) years as set out in Description of
Debt of the Prospectus.

120

MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF


OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our financial statements and the related notes as at and for
the years ended December 31, 2015, 2014 and 2013 included elsewhere in this Prospectus.
This discussion contains forward-looking statements that reflect our current views with respect
to future events and our future financial performance. These statements involve risks and
uncertainties, and our actual results may differ materially from those anticipated in these
forward-looking statements.
CRITICAL ACCOUNTING POLICIES
For a discussion of the critical accounting policies and significant accounting judgments and
estimates of SMC Global Power please see Notes 3 and 4 of the audited consolidated financial
statements included in this Prospectus.
In accounting for its IPPAs, Agreements with PSALM, SMC Global Powers management has
made a judgment that the IPPA Agreements are agreements that contain a lease.
The management of SMC Global Power has made a judgment that it has substantially acquired
all the risks and rewards incidental to the ownership of the IPPA Power Plants and therefore
accounted for the IPPA Agreements as a finance lease. Accordingly, SMC Global Power
recognized the IPPA Power Plants in its statements of financial position as an asset under
Property, plant and equipment and recognized the agreed monthly payments due to PSALM
under the IPPA Agreements as a liability under Finance lease liabilities. In each case, the
amount initially recognized equaled the present value of the agreed monthly payments to
PSALM. Please see Notes 3, 4, 7 and 12 of the audited consolidated financial statements
included in this Prospectus.
RESULTS OF OPERATIONS
Description of Certain Components of Our Results of Operations
Sale of Power and Electricity
Sale of power is revenue derived substantially from offtake agreements. It is recognized in the
period when actual power or capacity is generated, transmitted and sold to the customers, net
of related discounts and adjustments. Retail and other power-related services is revenue from
the supply of power to the customers. The Uniform Filing Requirements on the rate unbundling
released by the ERC specified the following bill components: (a) generation charge, (b)
transmission charge, (c) system loss charge, (d) distribution charge, (e) supply charge, (f)
metering charge, (g) currency exchange rate adjustments, where applicable and (h) interclass
and life subsidies. Feed-in tariffs allowance, VAT, local franchise tax and universal charges are
billed and collected on behalf of the national and local government and do not form part of SMC
Global Powers revenue. Generation, transmission and system loss charges, which are part of
revenues, are pass-through charges.
Cost of Power Sold
Cost of power sold consists primarily of (i) cost of coal, fuel oil and other consumables (which
consists primarily of the cost of purchasing coal for delivery to the IPP for the Sual Power
Plant and Limay Cogeneration Plant), (ii) energy fees, which reflect the variable component of
the monthly payments due from SMC Global Power to PSALM under the IPPA Agreements; (iii)
depreciation expense relating to the Sual, San Roque and Ilijan Power Plants under the finance
lease accounting method applicable to the IPPA Agreements and Limay Cogeneration Plant;
(iv) power purchased from external sources, which represents the cost of purchasing power
from the WESM and other generators; and (v) plant operations and maintenance fees for the
121

operation of Limay Cogeneration Plant.


Operating Expenses
For the years ended December 31, 2015, 2014 and 2013 operating expenses consist principally
of management fees, taxes and licenses, outside services, rent, corporate social responsibilityrelated expenses, market fees, impairment losses on receivables, donations, and other
expenses.
Other Income (Charges)
For the years ended December 31, 2015, 2014 and 2013, other income (charges) consists
mainly of (i) PSALM monthly fees reduction; (ii) finance cost, (iii) foreign exchange gains
(losses), (iv) equity in net losses of an associate and joint ventures, (v) interest income and (vi)
miscellaneous income (charges).
Under SMC Global Powers IPPA Agreements, each of the fixed monthly payments made is
apportioned between finance cost and reduction of the related finance lease liability so as to
achieve a constant rate of interest on the remaining balance of the finance lease liability.
Foreign exchange gains and losses result from the effect of exchange rate movements on SMC
Global Powers foreign currency-denominated monetary assets and liabilities.
Income Tax Expense
The income tax provision of SMC Global Power consists of:
Current income tax
Deferred income tax
SMEC, SPDC and SPPC are registered with the BOI as administrator/operator of their
respective power plant on a pioneer status with non-pioneer incentives and were granted ITH
for four (4) years without extension beginning August 1, 2010 up to July 31, 2014, subject to
compliance with certain requirements under their registrations. The ITH incentive availed was
limited only to the sale of power generated from the power plants.
In 2013, SMCPC and SCPC were registered with and granted incentives by the BOI on a
pioneer status for six (6) years subject to the representations and commitments set forth in the
application for registration, the provisions of Omnibus Investments Code of 1987, the rules and
regulations of the BOI and the terms and conditions prescribed. As of December 31, 2015,
SMCPC and SCPC have pending requests with the BOI to move the start of commercial
operations. The ITH incentives shall be limited only to the revenues from the sale of the
electricity generated from the power plants.
Results of Operations Period to Period Comparison
Year Ended December 31, 2015 compared to Year Ended December 31, 2014
Sale of Power
Sale of power decreased by 8.1% from 84.3 billion in 2014, reflecting the sale of 17,001
GWh of power, to 77.5 billion in 2015, reflecting the sale of 16,558 GWh of power. The
decrease in revenue was mainly driven by the significant decline in the sales quantity of the
Ilijan Power Plant owing to the lower output of the plant caused by the scheduled maintenance
outage of Malampaya gas facility in March and April 2015, the annual outage of Block 2 of the
Ilijan Power Plant and a series of natural gas supply restrictions as well as the more than 90days extended major maintenance outage of Unit 2 of Sual power plant in addition to lower
prices in the spot market.

122

Cost of Power Sold


Energy fees decreased by 24.5% from 30.8 billion in 2014 to 23.2 billion in 2015. The
decrease represents primarily the significant reduction in net generation of the Ilijan Power
Plant (from 8,576 GWh to 7,434 GWh) as a result of the abovementioned lower output of the
plant caused by the scheduled maintenance outage of Malampaya gas facility in March and
April 2015 and lower natural gas prices payable to PSALM with respect to the fuel of the Ilijan
Power Plant.
Cost of coal and other fuel oil decreased by 13.1% from 11.9 billion in 2014 to 10.4 billion
in 2015, primarily due to lower average coal prices per metric ton of the Sual and Limay
Cogeneration Power Plants in addition to the decrease in coal consumption in 2015 due to
lower net generation.
Power purchased from external sources increased by 37.8% from 6.0 billion in 2014 to 8.3
billion in 2015. The increase mainly represents the higher power purchased from other
generators due to lower net generation as a result of outages and WESM trading-related
charges.
Depreciation increased by 5.2% from 6.1 billion in 2014 to 6.5 billion in 2015, primarily due
to the recognition of additional depreciation of Units 3 and 4 of the Limay Cogeneration Plant
which were completed in August 2014.
Operating Expenses
Operating expenses increased by 68.4% from 2.9 billion in 2014 to 4.9 billion in 2015. The
principal factors contributing to this were: (i) the support fee in the amount of 628.9 million
paid and to be paid by SMC Global Power to its business partner, K-Water, in a joint venture
relating to the acquisition of the AHEPP, (ii) an increase in management fees of 740.1
million, (iii) higher business taxes relating mainly to real property taxes of the Limay
Cogeneration power plant and local business taxes of the Sual, Ilijan and San Roque Power
Plants of 539.8 million, (iv) an increase in rental charges of 244.2 million, and (iv) additional
corporate social responsibility projects of 115.9 million.
Other Income (Charges)
Equity in net losses of an associate and joint venture increased from (22.3) million in 2014
to (528.4) million in 2015, primarily because of the recognition of equity share in the loss from
operations of SMC Global Powers 60% interest in AHC, through PVEI, of (528.9) million and
SMC Global Powers 35% interest in OEDC amounting to 0.5 million earnings.
Foreign exchange losses increased from (813.6) million in 2014 to (7.6) billion in 2015,
primarily because of the depreciation of the Peso against the U.S. dollar from 44.72 per U.S.
dollar in 2014 to 47.06 per U.S. dollar in 2015. Finance costs remained relatively constant at
13.1 billion in 2015 and 13.2 billion in 2014.
Income Before Income Tax
As a result of the foregoing factors, income before income tax decreased from 13.3 billion in
2014 to 4.5 billion in 2015.
Income Tax Expense
Net income tax expense was relatively constant a t 2.7 billion tax expense f o r both 2014
and 2015 with the expiration of the income tax holiday of the IPPA Plants in July 31, 2014.

123

Net Income
As a result of the abovementioned reasons, net income decreased from 10.6 billion in
2014 to 1.8 billion in 2015. Unrealized foreign exchange losses increased from (1.6) billion
loss in 2014 to (7.5) billion in 2015, primarily because of the depreciation of the Peso against
the U.S. dollar from 44.72 per U.S. dollar in 2014 to 47.06 per U.S. dollar in 2015.
In 2014, discounting the unrealized foreign exchange differential, the net income would be
12.2 billion. In 2015, discounting the unrealized foreign exchange differential, net income
would be 9.3 billion. Thus, without the unrealized foreign exchange differentials, net income
would have decreased from 12.2 billion in 2014 to 9.3 billion in 2015.
Year Ended December 31, 2014 compared to Year Ended December 31, 2013
Sale of Power
Sale of power increased by 13.8% from 74.0 billion in 2013, reflecting the sale of 16,163
GWh of power, to 84.3 billion in 2014, reflecting the sale of 17,001 GWh of power. The
increase in revenue was mainly driven by higher bilateral volumes sold and improvements in
bilateral and WESM average realization prices.
Cost of Power Sold
Energy fees decreased by 1.6% from 31.3 billion in 2013 to 30.8 billion in 2014. The
decrease represents primarily the lower natural gas prices payable to PSALM with respect to
the fuel of the Ilijan Power Plant.
Cost of coal and other fuel oil increased by 6.9% from 11.2 billion in 2013 to 11.9 billion in
2014, primarily due to increase in net generation volume of the Sual Power Plant and
commercial operations of the four (4) units of Limay Cogeneration Plant in 2014. This was
partially offset by the decrease in global market prices in 2014.
Power purchased from external sources increased by 53.9% from 3.9 billion in 2013 to 6.0
billion in 2014. The increase was due to power requirements of APEC sourced from other
generators.
Depreciation increased by 14.1% from 5.4 billion in 2013 to 6.1 billion in 2014, primarily due
to depreciation of the Limay Cogeneration Plant which was acquired in September 2013.
Operating Expenses
Operating expenses increased by 88.1% from 1.5 billion in 2013 to 2.9 billion in 2014. The
principal factor contributing to this was the donation to Team Sual Corporation of a grab
type coal unloader amounting to 442.5 million. In addition, there was an increase in
the provision for impairment losses on receivable by 111.5 million, an increase in taxes
and licenses by 296.2 million for the real property tax of the Limay Cogeneration Plant and
donors tax for the coal unloader donation and an increase in outside services expenses by
108.0 million in 2014.
Other Income (Charges)
Equity in net earnings of an associate decreased from 795.0 million in 2013 to (22.3) million
loss in 2014, primarily because of the recognition of equity share in the loss from operation of
60% interest in AHEPP and 35% interest in OEDC in 2014, compared with the disposal of
Global Powers 6.13% interest in Meralco in 2013.
Foreign exchange losses significantly improved from (9.4) billion in 2013 to (813.6) million in
2014, primarily because of the substantial movement of the Peso against the U.S. dollar in
124

2013, from 41.050 U.S. dollar in 2012 to 44.395 per U.S. dollar in 2013 versus the movement
in the Peso against the U.S. dollar in 2014, from 44.395 U.S. dollar in 2013 to 44.720 U.S.
dollar in 2014.
Gain on sale of investment in 2014 was nil and 2.6 billion in 2013 as a result of the sale of
6.13% interest in Meralco shares. Finance cost increased from 12.7 billion in 2013 to 13.2
billion in 2014 due to additional drawn debt for the project finance of the Limay Cogeneration
Plant.
Income Before Income Tax
As a result of the foregoing factors, income before income tax increased from 3.2
billion in 2013 to 13.3 billion in 2014.
Income Tax Expense
Net income tax expense increased from (836.3) million tax benefit in 2013 to 2.7 billion tax
expense in 2014, primarily because of deferred income tax temporary difference of the excess
of depreciation and other related expenses over monthly PSALM payments and expiration of
income tax holidays in July 2014 for the IPPA Power Plants.
Net Income
As a result of the foregoing factors, net income increased from 4.0 billion in 2013 to 10.6
billion in 2014. Unrealized foreign exchange losses improved from (9.6) billion in 2013 to
(1.6) billion in 2014, primarily because of the nominal depreciation of the Peso against
the U.S. dollar in 2014, from 44.395 per U.S. dollar in 2013 to 44.720 per U.S. dollar in
2014.
In 2013, discounting the unrealized foreign exchange differential and nonrecurring income, the
net income would be 11.0 billion. In 2014, discounting the unrealized foreign exchange
differential, the net income would be 12.2 billion. Thus, without the unrealized foreign
exchange differential and nonrecurring income, net income would have increased from 11.0
billion in 2013 to 12.2 billion in 2014.
Year Ended December 31, 2013 compared to Year Ended December 31, 2012
Sale of Power
Sale of power decreased by 0.8% from 74.7 billion in 2012, reflecting the sale of 15,961
GWh of power, to 74.0 billion in 2013, reflecting the sale of 16,163 GWh of power. The
decrease in revenues resulted primarily from lower average WESM prices in 2013. This was
partially offset by increased in generation volume mainly attributable to Suals improved plant
utilization.
Cost of Power Sold
Energy fees decreased by 5.7% from 33.1 billion in 2012 to 31.3 billion in 2013. The
decrease represents primarily the lower energy fees payable to PSALM with respect to the Ilijan
Power Plant due to the change in transition supply contract to the new power supply contract of
Meralco.
Cost of coal and other fuel oil decreased by 14.4% from 13.1 billion in 2012 to 11.2 billion in
2013, primarily due to lower average coal consumption cost per metric ton. This was
partially offset by an increase in the quantity of coal consumed due to the increase in net
generation for 2013.
Power purchased from external sources decreased by 11.7% from 4.5 billion in 2012 to 3.9
billion in 2013. The decrease was due to lower quantity of power purchased from WESM.
125

Depreciation increased by 3.8% from 5.2 billion in 2012 to 5.4 billion in 2013, primarily due
to depreciation of the Limay Cogeneration Plant acquired in September 2013.
Operating Expenses
Operating expenses decreased by 6.8% from 1.7 billion in 2012 to 1.6 billion in 2013. The
principal factors contributing to the decrease were lower provision for impairment losses on
receivable by 280.3 million, lower professional fees by 107.7 million and lower outside
services expenses by 235.3 million in 2013.
Other Income (Charges)
Equity in net earnings of an associate decreased from 1.1 billion in 2012 to 795.0 million in
2013, primarily because of the disposal of SMC Global Powers 6.13% interest in Meralco in
2013 and the non-recognition of equity share for the fourth (4th) quarter. Going forward equity in
net earnings from the Meralco investment will not be recognized. (Please see Note 13 of the
2013 Audited Consolidated Financial Statements).
Foreign exchange differential decreased from 7.7 billion gain in 2012 to (9.4) billion loss in
2013, primarily because of the depreciation of the Peso against the U.S. dollar in 2013, from
41.050 U.S. dollar in 2012 to 44.395 per U.S. dollar in 2013.
Gain on sale of investment increased from 106.6 million in 2012, which represents the
sale of interests in Rockwell shares to 2.6 billion in 2013 as a result of the sale of Meralco
shares. Finance cost remained relatively constant at 12.7 billion in 2012 and 2013.
Income Before Income Tax
As a result of the foregoing factors, income before income tax decreased from 15.6
billion in 2012 to 3.2 billion in 2013.
Income Tax Expense
Net income tax expense decreased from 1.4 billion tax expense in 2012 to (836.3) million
tax benefit in 2013, primarily because of deferred income tax temporary difference of the
excess of depreciation and other related expenses over monthly PSALM payments.
Net Income
As a result of the foregoing factors, net income decreased from 14.2 billion in 2012 to 4.0
billion in 2013. Unrealized foreign exchange differential decreased from 7.8 billion gain in
2012 to (9.6) billion loss in 2013, primarily because of the depreciation of the Peso against the
U.S. dollar in 2013, from 41.050 per U.S. dollar in 2012 to 44.395 per U.S. dollar in 2013.
In 2012, discounting the unrealized foreign exchange differential and nonrecurring income, the
net income would be 6.3 billion. In 2013, discounting the unrealized foreign exchange
differential and nonrecurring income, the net income would be 11.0 billion. Thus, without
the unrealized foreign exchange differential and nonrecurring income, net income would have
increased from 6.3 billion in 2012 to 11.0 billion in 2013.

126

LIQUIDITY AND CAPITAL RESOURCES


Cash Flows
For the years ended December 31,
2013
2014
2015
(in millions of )

Net cash flows provided by operating activities . . . . . . . . . . . . . .


Net cash flows used in investing activities . . . . . . . . . . . . . . . . . .
Net cash flows provided by (used in) financing activities . . . . . . .
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . .
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . .

25,664.0
(20,764.8)
837.7
(167.2)
5,569.7
23,555.4
29,125.2

32,855.8
(6,432.7)
(16,430.3)
(813.6)
9,179.1
29,125.2
38,304.3

25,251.1
(34,751.2)
(6,955.4)
392.5
(16,062.9)
38,304.3
22,241.4

Net Cash Flows Provided by Operating Activities


January to December 2015
Net cash flows provided by operating activities was 25.3 billion. This was mainly the result of
income before tax of 4.5 billion, adjusted for non-cash items and changes in working capital,
including interest expense and other financing charges of 13.1 billion, net unrealized foreign
exchange losses of 7.5 billion, depreciation and amortization of 6.5 billion, equity in net
losses of an associate and joint ventures of 528.4 million, impairment losses on trade and other
receivables of 374.8 million, a net decrease in working capital of 3.0 billion, finance costs paid
of 2.9 billion, interest received of 426.5 million and payment for income taxes of 1.5 billion.
The net decrease in working capital was mainly due to increase in prepaid expenses and other
current assets that pertains to current and deferred Input VAT on purchases.
January to December 2014
Net cash flows provided by operating activities was 32.9 billion. This was mainly the result of
income before tax of 13.3 billion, adjusted for non-cash items and changes in working capital,
including interest expense and other financing charges of 13.2 billion, net unrealized foreign
exchange losses of 1.6 billion, depreciation and amortization of 6.2 billion, equity in net
losses of an associate and joint ventures of 22.3 million, impairment losses on trade
receivables of 144.4 million, a net increase in working capital of 2.3 billion, finance costs paid
of 2.2 billion, interest received of 546.4 million and payment for income taxes of 1.7 billion.
The net increase in working capital was mainly due to increase in accounts payable and accrued
expenses.
January to December 2013
Net cash flows provided by operating activities was 25.7 billion. This was mainly the result of
income before tax of 3.2 billion, adjusted for non-cash items and changes in working capital,
including interest expense and other financing charges of 12.7 billion, net unrealized foreign
exchange losses of 9.6 billion, depreciation and amortization of 5.4 billion, equity in net
earnings of associates of 795.0 million, impairment losses on trade receivables of 32.9
million, a net decrease in working capital of 857.3 million, finance costs paid of 800.1 million,
interest received of 527.7 million and payment for income taxes of 294.1 million. The net
decrease in working capital was mainly due to increase in trade and other receivables and
prepaid expenses and other current assets that pertains to current and deferred Input VAT on
purchases.

127

Net Cash Flows Used in Investing Activities


January to December 2015
The net cash flows used in investing activities of 34.8 billion was due to additions in property,
plant and equipment pertaining to the construction of greenfield power plants in Malita and Limay
of 33.8 billion, additions to investments and advances of 529.1 million, increase in noncurrent
receivable of 253.8 million, additions to intangible asset of 117.7 million and deferred
exploration and development costs of 17.8 million.
January to December 2014
The net cash flows used in investing activities of 6.4 billion was due to net changes from
additions in property, plant and equipment pertaining to the construction of Limay Cogeneration
power plant and greenfield power plants in Malita and Limay of 17.3 billion, additions to
investments and advances of 4.6 billion, additions to intangible asset of 593.6 million,
deferred exploration and development costs of 145.8 million and proceeds from sale of 6.13%
interest in Meralco of 16.2 billion.
January to December 2013
The net cash flows used in investing activities of 20.8 billion was due to net changes from
additions in property, plant and equipment pertaining to the acquisition of Limay Cogeneration
power plant from Petron and construction of greenfield power plants in Malita and Limay of
19.1 billion, additions to investments and advances of 2.1 billion, deferred exploration and
development costs of 200.8 million and dividend proceeds from 6.13% interest in Meralco of
704.4 million.
Net Cash Flows Used in Financing Activities
January to December 2015
Net cash flows used in financing activities of 7.0 billion consisted of proceeds from issuance of
U.S.$300 million undated subordinated capital securities of 13.8 billion issued August 2015,
drawn the remaining U.S.$200 million or 8.8 billion out of the U.S.$700 million 5-year term loan
facility of the Company, payments of finance lease liabilities to PSALM amounting to 22.3
billion, cash dividends paid to SMC of 4.5 billion, distributions to undated subordinated capital
securities holders of 1.5 billion and payment of long-term debt of SMC Powergen Inc. of 1.4
billion.
January to December 2014
Net cash flows used in financing activities of 16.4 billion consisted of proceeds from issuance
of U.S.$300 undated subordinated capital securities of 13.1 billion issued May 2014, drawn the
remaining 1.5 billion from the loan facility of SMC Powergen Inc., payments of finance lease
liabilities to PSALM amounting to 20.1 billion, cash dividends paid to SMC of 10.0 billion,
distributions to undated subordinated capital securities holders of 723.2 million and payment of
long-term debt of SMC Powergen Inc. of 193.2 million.
January to December 2013
Net cash flows provided by financing activities of 837.7 million consisted of U.S.$500 million or
20.9 billion proceeds from the U.S.$700 million 5-year term loan facility entered into by the
Company in 2013, drawn 12.3 billion from the loan facility of SMC Powergen Inc., payments of
finance lease liabilities to PSALM amounting to 19.1 billion, cash dividends paid to SMC of
4.5 billion, and payment of U.S.$200 million or 8.7 billion 3-year term loan facility entered into
by the Company in 2011.

128

Key Performance Indicators


The major financial indicator being used by the Company is Ratio of net debt to EBITDA or
Leverage Ratio which should not exceed 5.5x:
Leverage Ratio(1)

2013

2014

2015

0.75

(0.24)

4.49

The manner by which the Company calculates the above indicator is as follows:
Leverage Ratio(1)
Net debt(2)
EBITDA(3)
(1)

Ratio of Net Debt to EBITDA is computed using net debt and EBITDA, in each case excluding amounts attributable to ringfenced subsidiaries.

(2)

Net debt represents the sum of long-term debt net of current maturities and debt issue costs and current maturities of longterm debt net of debt issue costs less cash and cash equivalents and excluding PSALM finance lease liabilities, in each case,
excluding amounts attributable to ring-fenced subsidiaries.

(3)

Calculated as (a) net income (excluding items between any or all of the Company and its subsidiaries) plus (b) income tax
expense (benefit), finance cost (less interest income) and depreciation, in each case excluding amounts attributable to ringfenced subsidiaries less (c) foreign exchange gain (loss), gain on sale of investment and aggregate fixed payments made to
PSALM. EBITDA should not be viewed in isolation or as an alternative to financial measures calculated in accordance with
PFRS.

Note: For further discussion on Key Performance Indicators, please refer to Discussion of the
Groups Financial Soundness Indicators in the F-pages of this Prospectus.
Liquidity and Indebtedness
For the years 2015 and 2014, the main source of liquidity of the Company was from cash from
sale of power and electricity. It expects to meet its working capital requirements, capital
expenditures, and dividend payments. The Company may seek other sources of funding for its
future capital expenditures, which may include debt and/or equity financing, depending on its
needs and market conditions.
Contractual Obligations / Liabilities
The following table summarizes the maturity analysis of the contractual obligations of the
Company based on undiscounted payments as of December 31, 2015:
Carrying
Amount

Contractual
Cash Flow

1 Year
or Less

More than
1 Year

(in millions of )

Accounts payable and accrued expenses*


Finance lease liabilities (including current portion)

27,707.7

27,707.7

27,707.7

179,193.2

231,795.5

23,755.5

208,040.0

58,607.9

59,293.7

15,691.2

43,602.5

265,508.8

318,796.9

67,154.4

251,642.5

Long-term debt net (including current portion)

* Excluding statutory payables

Capital Resources
The Company maintains a sound capital base to ensure its ability to continue as a going
concern, thereby continue to provide returns to stockholders and benefits to other stockholders
and to maintain an optimal capital structure to reduce cost of capital.
The Company manages its capital structure and makes adjustments in the light of changes in
economic conditions. To maintain or adjust the capital structure, the Company may adjust the
dividend payment to shareholders, distribution payment, pay-off existing debts, return capital to
shareholders or issue new shares, subject to compliance with certain covenants of its long-term
129

debt and undated subordinated capital securities.


As of December 31, 2015, the Company has cash and cash equivalents of 22.2 billion, current
assets of 57.0 billion and current liabilities of 65.1 billion. For the same year, long term debt
including current maturities and net of debt issue costs amounted to 58.6 billion.
The Company is in compliance with the financial covenants as of the date of this Prospectus.
As of the same date, the Company has 1,250 million common shares with par value of 1 per
share.
Capital Expenditures
SMC Global Power invested 33.8 billion, 17.3 billion and 19.1 billion in capital expenditures
during the years 2015, 2014 and 2013 respectively. Majority of these amounts were used for the
acquisition of Limay Cogeneration power plant and construction of greenfield power plants in
Malita and Limay.
Off-Balance Sheet Arrangements
SMC Global Power does not have material off-balance sheet arrangements with other entities
Financial Risk Management Objectives and Policies
The Company has significant exposure to the following financial risks primarily from its use of
financial instruments:

Interest Rate Risk


Foreign Currency Risk
Liquidity Risk
Credit Risk

This note presents information about the exposure to each of the foregoing risks, the objectives,
policies and processes for measuring and managing these risks, and for management of capital.
The principal non-trade related financial instruments of the Company include cash and cash
equivalents, other receivables (current and noncurrent), restricted cash, non-trade payables, and
long-term debt. These financial instruments are used mainly for working capital management
and investment purposes. The trade-related financial assets and financial liabilities of the
Company such as trade receivables, accounts payable and accrued expenses and finance lease
liabilities arise directly from and are used to facilitate its daily operations.
The Board of Director has the overall responsibility for the establishment and oversight of the
risk management framework of the Company. The Board of Director has established the Risk
Management Committee, which is responsible for developing and monitoring the risk
management policies. The committee reports regularly to the Company on its activities.
The risk management policies of the Company are established to identify and analyze the risks
faced by the Company, to set appropriate risk limits and controls, and to monitor risks and
adherence to limits. Risk management policies and systems are reviewed regularly to reflect
changes in market conditions and activities. The Company, through its training and management
standards and procedures, aims to develop a disciplined and constructive control environment in
which all employees understand their roles and obligations.
The Board of Director oversees how management monitors compliance with SMCs risk
management policies and procedures, and reviews the adequacy of the risk management
framework in relation to the risks faced by the Company. The Board of Director is assisted in its
oversight role by SMCs Internal Audit. Internal Audit undertakes both regular and ad hoc
130

reviews of risk management controls and procedures, the results of which are reported to the
Board of Director.
Interest Rate Risk
Interest rate risk is the risk that future cash flows from a financial instrument (cash flow interest
rate risk) or its fair value (fair value interest rate risk) will fluctuate because of changes in market
interest rates. The Companys exposure to changes in interest rates relates primarily to the longterm borrowings. Borrowings issued at fixed rates expose the Company to fair value interest rate
risk. On the other hand, borrowings issued at variable rates expose the Company to cash flow
interest rate risk.
Management is responsible for monitoring the prevailing market-based interest rate and ensures
that the mark-up rates charged on its borrowings are optimal and benchmarked against the rates
charged by other creditor banks.
On the other hand, the investment policy of the Company is to maintain an adequate yield to
match or reduce the net interest cost from its borrowings pending the deployment of funds to
their intended use in the operations and working capital management. However, the Company
invests only in high-quality short-term investments while maintaining the necessary
diversification to avoid concentration risk.
In managing interest rate risk, the Company aims to reduce the impact of short-term fluctuations
on the earnings. Over the longer term, however, permanent changes in interest rates would have
an impact on profit or loss.
The management of interest rate risk is also supplemented by monitoring the sensitivity of the
Companys financial instruments to various standard and non-standard interest rate scenarios.
Interest rate movements affect reported equity from increases or decreases in interest income or
interest expense as well as fair value changes reported in profit or loss, if any.
Foreign Currency Risk
The exposure to foreign currency risk results from significant movements in foreign exchange
rates that adversely affect the foreign currency-denominated transactions of the Company. The
risk management objective with respect to foreign currency risk is to reduce or eliminate
earnings volatility and any adverse impact on equity.

131

Information on the Companys foreign currency-denominated monetary assets and monetary


liabilities and their Philippine peso equivalents as of December 31 are as follows:
2015
US Dollar
Assets
Cash and cash equivalents

U.S.$210.6

Trade and other receivables

2014
Peso
Peso
Equivalent
US Dollar Equivalent
(in millions of)
9,909.8

U.S.$260.2

11,635.2

81.7

3,847.0

83.9

3,753.5

292.3

13,756.8

344.1

15,388.7

278.8

13,121.8

148.2

6,633.7

Finance lease liabilities

2,057.6

96,831.4

2,217.0

99,143.3

Long-term debt

1,000.0

47,060.0

800.0

35,776.0

3,336.4

157,013.2

3,165.2

141,553.0

143,256.4 U.S.$2,821.1

126,164.3

Liabilities
Accounts payable and accrued expenses

Net foreign currency-denominated monetary liabilities

U.S.$3,044.1

The management of foreign currency risk is also supplemented by monitoring the sensitivity of
the Companys financial instruments to various foreign currency exchange rate scenarios.
Foreign exchange movements affect reported equity from increases or decreases in unrealized
and realized foreign exchange gains or losses.
Liquidity Risk
Liquidity risk pertains to the risk that the Company will encounter difficulty to meet payment
obligations when they fall under normal and stress circumstances.
The Companys objectives to manage its liquidity risk are as follows: a) to ensure that adequate
funding is available at all times; b) to meet commitments as they arise without incurring
unnecessary costs; c) to be able to access funding when needed at the least possible cost; and
d) to maintain an adequate time spread of refinancing maturities.
The Company constantly monitors and manages its liquidity position, liquidity gaps and surplus
on a daily basis. A committed stand-by credit facility from several local banks is also available to
ensure availability of funds when necessary.
Credit Risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial
instrument fails to meet its contractual obligations, and arises principally from the trade and other
receivables. The Company manages its credit risk mainly through the application of transaction
limits and close risk monitoring. It is the Companys policy to enter into transactions with a wide
diversity of creditworthy customer or counterparty to mitigate any significant concentration of
credit risk.
The Company has regular internal control reviews to monitor the granting of credit and
management of credit exposures. Where appropriate, the Company obtains collateral or
arranges master netting agreements.
Other Matters
There are no unusual items as to nature and amount affecting assets, liabilities, equity, net
income or cash flows, except those stated in Managements Discussion and Analysis of
Financial Position and Financial Performance.
There were no material changes in estimates of amounts reported in prior financial years.
132

There were no known trends, demands, commitments, events or uncertainties that will have
a material impact on the liquidity of the Company.
There were no known trends, events or uncertainties that have had or that are reasonably
expected to have a favorable or unfavorable impact on net sales or revenues or income from
continuing operation.
There were no known events that will trigger direct or contingent financial obligation that is
material to the Company, including any default or acceleration of an obligation and there
were no changes in contingent liabilities and contingent assets since the last annual
reporting date.
There were no material off statements of financial position transactions, arrangements,
obligations (including contingent obligations), and other relationship of the Company with
unconsolidated entities or other persons created during the reporting period.
The effects of seasonality or cyclicality on the operations of the business of the Company are
not material.

133

MANAGEMENT AND CERTAIN SECURITY HOLDERS


The table below sets forth each member of the Board of Directors of the Company as of
the date of this Prospectus:
Age

Position

Citizenship

Year Appointed

Ramon S. Ang

62

Chairman

Filipino

2010

Ferdinand K. Constantino

64

Director

Filipino

2010

Alan T. Ortiz

62

Director

Filipino

2010

Aurora T. Calderon

61

Director

Filipino

2010

Virgilio S. Jacinto

59

Director

Filipino

2010

Jack G. Arroyo, Jr.

58

Independent
Director

Filipino

2011

Consuelo M. Ynares-Santiago

76

Independent
Director

Filipino

2011

Name

Certain information on the business and working experiences of the Directors for the last five (5)
years set out below.
Ramon S. Ang is the incumbent Chairman of the Board and Chief Executive Officer of SMC
Global Power since August 31, 2010 and the Chairman of the Executive Committee of SMC
Global Power since September 2, 2011. He is the Vice Chairman of San Miguel Corporation
since January 28, 1999, and the President and Chief Operating Officer of San Miguel
Corporation since March 6, 2002. He is also a Member of the Executive Committee and
Nomination and Hearing Committee of San Miguel Corporation. He also holds, among others,
the following positions in other publicly listed companies: President and Chief Executive Officer
of Top Frontier Investment Holdings, Inc. and Petron Corporation; Chairman of the Board of San
Miguel Brewery Inc. and San Miguel Brewery Hong Kong Limited (listed in the Hong Kong Stock
Exchange); Vice Chairman of the Board of Ginebra San Miguel, Inc., and San Miguel Pure
Foods Company, Inc. He is also the Chairman and President of San Miguel Holdings Corp.
and San Miguel Equity Investments Inc.; Chairman of the Board of Sea Refinery Corporation,
San Miguel Foods, Inc., San Miguel Yamamura Packaging Corporation, San Miguel Properties,
Inc., Clariden Holdings, Inc., Anchor Insurance Brokerage Corporation, Philippine Diamond
Hotel & Resort, Inc., Philippine Oriental Realty Development, Inc., and Atea Tierra Corporation.
He is also the sole director and shareholder of Master Year Limited and the Chairman of Privado
Holdings, Corp. He formerly held the following positions: President and Chief Operating Officer
of PAL Holdings, Inc., Philippine Airlines, Inc.; Director of Air Philippines Corporation;
Chairman of the Board of Cyber Bay Corporation; and Vice Chairman of the Board and
Director of Manila Electric Company. Mr. Ang has held directorships in various domestic and
international subsidiaries of San Miguel Corporation in the last five years. He has a Bachelor of
Science degree in Mechanical Engineering from Far Eastern University.
Ferdinand K. Constantino is a Director of SMC Global Power since August 31, 2010 and the
Vice Chairman of the Board since September 2, 2011 of SMC Global Power, and was its
Treasurer from August 31, 2010 to September 1, 2011. He is a member of the Executive
Committee, Audit Committee and Executive Compensation Committee of SMC Global Power
since September 2, 2011. He is also a Director of San Miguel Corporation since May 31,
2010 and the Senior Vice President, Chief Finance Officer and Treasurer of San Miguel
Corporation. He is a member of the Executive Committee, Audit Committee, Executive
Compensation Committee and Nomination and Hearing Committee of San Miguel Corporation.
He also holds, among others, the following positions in other publicly-listed companies: Director
of San Miguel Brewery Inc., Top Frontier Investment Holdings, Inc. and Petron Malaysia Refining
134

& Marketing Bhd, a company publicly listed in Malaysia. He is also the President of Anchor
Insurance Brokerage Corporation; Director of San Miguel Yamamura Packaging Corporation,
San Miguel Foods Inc., Citra Metro Manila Tollways Corporation and Northern Cement
Corporation; and Chairman of the San Miguel Foundation, Inc. He was formerly a Director of
PAL Holdings, Inc., and Philippine Airlines, Inc. Mr. Constantino previously served San Miguel
Corporation as Chief Finance Officer of the San Miguel Beer Division (1999-2005); Chief
Finance Officer and Treasurer of San Miguel Brewery Inc. (2007-2009); Director of San Miguel
Pure Foods Company, Inc. (2008-2009); Director of San Miguel Properties, Inc. (2001-2009);
and Chief Finance Officer of Manila Electric Company (2009). He has held directorships in
various domestic and international subsidiaries of San Miguel Corporation during the last five
years. He holds a degree in AB Economics from the University of the Philippines and completed
academic requirements for an MA Economics degree.
Alan T. Ortiz is the incumbent President and Chief Operating Officer of SMC Global Power
since August 31, 2010 and a member of the Audit Committee and Nomination and Election
Committee of SMC Global Power since September 2, 2011. Previously, he was a Director of
the Manila Electric Company. He is currently the Managing Partner of CEOs Inc., a Director and
Treasurer of Global Resource for Outsourced Workers, Inc., and an Assistant Professor in the
Department of Economics/Political Science of the Ateneo de Manila University.
Aurora T. Calderon is a Director of SMC Global Power since August 31, 2010 and a member of
the Executive Committee and Chairperson of the Executive Compensation Committee of SMC
Global Power since September 2, 2011. She is also a director of San Miguel Corporation
since June 10, 2014 and also the Senior Vice President-Senior Executive Assistant to the
President and Chief Operating Officer of San Miguel Corporation since January 20, 2011. She is
a member of the Executive Compensation Committee of San Miguel Corporation. She holds the
following positions in other publicly listed companies: Director and Treasurer of Top Frontier
Investment Holdings, Inc. and Director of Petron Corporation. She is also a member of the board
of directors of Petron Marketing Corporation, Petron Freeport Corporation, New Ventures Realty
Corporation, Las Lucas Construction and Development Corp., Thai San Miguel Liquor Co., San
Miguel Equity Investments Inc., Bank of Commerce, and Kankiyo Corporation. She is the
President and the Director of Total Managers, Inc. She was formerly a Director of PAL Holdings,
Inc., Philippine Airlines, Inc., Trustmark Holdings Corporation, Zuma Holdings and Management
Corporation, Air Philippines Corporation, and Manila Electric Company. A certified public
accountant, Ms. Calderon graduated from the University of the East with a degree in BS
Business Administration, major in Accountancy, magna cum laude. In addition, Ms.
Calderon holds directorships in various San Miguel Corporation domestic and international
subsidiaries.
Virgilio S. Jacinto is the Corporate Secretary of SMC Global Power since August 31, 2010, a
Director, the Compliance Officer and a member of the Nomination Committee and Election
Committee of SMC Global Power since September 2, 2011. He is also the Corporate Secretary,
Senior Vice-President, General Counsel and Compliance Officer of San Miguel Corporation
(since October 2010). He is also the Corporate Secretary and Compliance Officer of Top
Frontier Investment Holdings, Inc. and Ginebra San Miguel, Inc. He is a Director of San Miguel
Brewery Inc. and Petron Corporation. He was formerly the Vice President and First Deputy
General Counsel from 2006 to 2010 of San Miguel Corporation. He was Director and Corporate
Secretary of UCPB, Partner at Villareal Law Offices and Associate at SyCip, Salazar, Feliciano
& Hernandez Law Office. Atty. Jacinto is an Associate Professor at the University of the
Philippines, College of Law. He obtained his law degree from the University of the Philippines.
He holds a Master of Laws degree from Harvard Law School. He holds various directorships in
various local and offshore subsidiaries of San Miguel Corporation.

135

Jack G. Arroyo, Jr. is an Independent Director of SMC Global Power, the Chairman of the Audit
Committee, and a member of the Executive Compensation Committee of SMC Global Power,
since September 2, 2011. He is a medical doctor and ophthalmologist by profession and is
currently affiliated with The American Eye Center, The Medical City, and Eye Referral Center.
He is also a member of the Board of Directors of the Philippine Healthcare Educators, Inc. and
the ASEAN Eye Center Association. He is also currently the President of Casino Espaol de
Manila.
Consuelo M. Ynares-Santiago is an Independent Director of SMC Global Power, the
Chairperson of the Nomination and Election Committee, and a member of the Audit Committee
of SMC Global Power, since September 2, 2011. She is also an Independent Director of Anchor
Insurance Brokerage Corporation since 2012, Top Frontier Investment Holdings, Inc. since
2013, South Luzon Tollway Corporation since 2015 and Phoenix Petroleum Phil. Inc. She
served as an Associate Justice of the Supreme Court of the Philippines from 1999 to 2009;
Associate Justice of the Court of Appeals of the Philippines from 1990 to 1999; Regional
Trial Court Judge of Makati, Branch 149 from 1986 to 1990; Metropolitan Trial Court Judge of
Pasig, Brach 69 from 1983 to 1984 and of Caloocan City, Branch 41 from January to October
1983, a Municipal Judge in Cainta, Rizal from 1973 to 1983; and as a Legal Officer of the
SEC from February 1986 to July 1973. She obtained her law degree from the University of the
Philippines in 1962.
Set below are the names, ages, positions, citizenship and years of appointment of the Executive
Officers and senior management of the Company as of the date of this Prospectus.
Name

Age

Citizenship

Year Position
was Assumed

Chairman & Chief


Executive Officer
Vice Chairman
President & Chief
Operating Officer

Filipino

2010

Filipino

2010

Filipino

2010

Corporate Secretary

Filipino

2010

Filipino

2011

Filipino

2011

Position

Ramon S. Ang

62

Ferdinand K. Constantino

64

Alan T. Ortiz

62

Virgilio S. Jacinto

59

Elenita D. Go

55

Alexander B.M. Simon

52

Ramon U. Agay

58

Assistant Vice President &


Finance Manager

Filipino

2011

Irene M. Cipriano

41

Assistant Corporate
Secretary

Filipino

2010

General Manager and


Energy Sourcing & Trading
Group Head
Assistant Vice President &
Chief Finance Officer

Certain information on the business and working experiences of the Executive Officers and
Senior Management for the last five (5) years set out below.
Elenita D. Go is the General Manager of SMC Global Power since December 14, 2011. She
joined SMC Global Power in June 2011 as head of its Sales and Trading Group. She was also a
Member of the Board of Directors of Meralco from November 2009 until June 2010. From April
2008 until October 2010, Ms. Go was the head of the Corporate Procurement Unit of San Miguel
Corporation. Ms. Go obtained her Masters in Business Administration degree from Ateneo de
Manila Graduate School of Business and her Bachelor of Science degree in Electrical
Engineering from Mapua Institute of Technology.

136

Alexander B.M. Simon is the Chief Finance Officer of SMC Global Power since September 2,
2011 and was appointed Assistant Vice President on March 25, 2015. He had served as a
financial consultant (2008-2011) to various private companies. He had held, among others, the
following positions: Vice President for Finance and Accounting of PruLife of UK (2006-2008);
Vice President for Finance and Administration and Chief Finance Officer of LST, Inc. (20042006), financial consultant to various SMEs (2003-2004); Vice President for Finance and
Administration and Chief Finance Officer of Philamcare Health Systems (2003); Vice President
and Group Treasurer/Finance Head of the Marsman Drysdale Group (2001-2003); Assistant
Vice President, Treasury of Bayan Telecommunications, Inc. (1996-2001); Assistant Vice
President, Treasury of Isla Communications Company, Inc. (1995-1996); and Assistant Vice
President of Investment & Capital Corporation of the Philippines (1992-1995).
Ramon U. Agay is the Finance Manager of SMC Global Power since September 2, 2011 and
was appointed Assistant Vice President on March 25, 2015. He is also the Finance Manager of
the various subsidiaries of SMC Global Power, and the Treasurer of Daguma Agro, Bonanza
Energy and Sultan Energy. He had previously held finance positions in San Miguel Corporation
and its subsidiaries.
Irene M. Cipriano is the Assistant Corporate Secretary of SMC Global Power since 2010. She is
an Assistant Vice President and Associate General Counsel of San Miguel Corporation. She is
also the Corporate Secretary of San Miguel Equity Investments Inc. (since 2011) and Assistant
Corporate Secretary of Top Frontier Investment Holdings, Inc. (since 2013), and of various
subsidiaries of SMC Global Power and San Miguel Corporation. Atty. Cipriano was formerly the
Assistant Corporate Secretary of PAL Holdings, Inc. (2012-2014) and Philippine Airlines Inc.
(2012-2014).
SIGNIFICANT EMPLOYEES
The Company has no significant employee or personnel who was not an executive officer but is
expected to make a significant contribution to the business.
FAMILY RELATIONSHIPS
There are no family relationships up to the fourth civil degree either by consanguinity or affinity
among directors and/or executive officers of the Company.
INVOLVEMENT OF DIRECTORS AND OFFICERS IN CERTAIN LEGAL PROCEEDINGS
The Company is not aware that any one of the incumbent directors and executive officers and
persons nominated to become a director and executive officer has been the subject of a
bankruptcy petition or a conviction by final judgment in a criminal proceeding, domestic or
foreign, excluding traffic violations and other minor offenses, or has been by judgment or decree
found to have violated securities or commodities law and enjoined from engaging in any
business, securities, commodities or banking activities for the past five years until the date of this
Prospectus.

137

EXECUTIVE COMPENSATION
From the years 2013 to 2015, the Chairman and Chief Executive Officer and Vice Chairman of
the Company were the only Executive Officers who did not receive any compensation from
SMC Global Power.
The following table summarizes the aggregate compensation paid to the other officers and
managers of the Company during the periods indicated below:
Name

Total compensation of the Chief


Operating Officer (President) and
senior Executive Officers other than
the President1
All other officers and managers
as a group

Year

Salary

Bonus

2015

23,517,360.00

9,465,158.00

2014

21,389,600.00

7,690,767.00

2013

18,868,080.00

4,332,713.00

2015

30,258,675.00

23,794,543.29

2014

27,900,550.00

18,804,718.96

2013

25,984,790.00

17,299,829.48

The President and senior Executive Officers of the Company for 2013 to 2015 are Alan T. Ortiz, Elenita D. Go,
Alexander Benhur M. Simon, and Ramon U. Agay.

Standard Arrangements
The executive officers are covered by standard employment contracts and employees
retirement plan and can be terminated upon appropriate notice. Other than reasonable per
diem, or as may be determined by the Board for every meeting, the Directors of the
Company have not received any salary or compensation for their services as directors and
for their committee participations. There are no other special arrangements pursuant to
which any director was compensated. There is no compensatory plan or arrangement for the
termination, resignation, or retirement of a member of the Board.
Other Arrangements
There are no other arrangements for which the Directors are compensated by the Company for
services other than those provided as a Director.
Employment Contract
In lieu of an employment contract, the Directors are elected at the annual meeting of
stockholders for one year term. Any Director elected in the interim will serve for the remaining
term until the next annual meeting.
Warrants or Options Outstanding
There are no warrants or options held by Directors or Executive Officers.

138

SECURITY OWNERSHIP OF CERTAIN RECORD AND BENEFICIAL


OWNERS
(a)

Security Ownership of Certain Records and Beneficial Owners of more than 5% as at


December 31, 2015
Title of
Class

Name and Address of


Record Owner and
Relationship with
Issuer

Name of
Beneficial
Owner and
Relationship
with Record
Owner

Citizenship

No. of Shares
Held

% Out
of Total
Outstanding
Shares

Common

San Miguel Corporation


40 San Miguel Avenue,
Mandaluyong City

Same as
record owner

Filipino

1,250,000,000

100.00%

Nature of Relationship:
Parent

(b)

Security Ownership of Directors and Management as at December 31, 2015


Title of
Class

(c)

Name of Beneficial Owner

Amount and
Nature of
Ownership

Citizenship

% Out
of Total
Outstanding
Shares

Common

Ramon S. Ang

500 (of record)

Filipino

0.00%

Common

Ferdinand K. Constantino

500 (of record)

Filipino

0.00%

Common

Alan T. Ortiz

500 (of record)

Filipino

0.00%

Common

Aurora T. Calderon

500 (of record)

Filipino

0.00%

Common

Virgilio S. Jacinto

500 (of record)

Filipino

0.00%

Common

Jack G. Arroyo, Jr.

500 (of record)

Filipino

0.00%

Common

Consuelo M. Ynares-Santiago

500 (of record)

Filipino

0.00%

Security Ownership of Certain Records and Beneficial Owners of more than


5% as of date of this Prospectus
Title of
Class

Common

Name and Address of


Record Owner and
Relationship with Issuer

San Miguel Corporation


40 San Miguel Avenue,
Mandaluyong City
Nature of Relationship:
Parent

Name of
Beneficial
Owner and
Relationship
with Record
Owner
Same as
record owner

139

Citizenship

No. of Shares
Held

% Out
of Total
Outstanding
Shares

Filipino

1,250,000,000

100.00%

(d)

Security Ownership of Directors and Management as of date of this Prospectus


Title of
Class

Name of Beneficial Owner

Amount and
Nature of
Ownership

Citizenship

% Out
of Total
Outstanding
Shares

Common

Ramon S. Ang

500 (of record)

Filipino

0.00%

Common

Ferdinand K. Constantino

500 (of record)

Filipino

0.00%

Common

Alan T. Ortiz

500 (of record)

Filipino

0.00%

Common

Aurora T. Calderon

500 (of record)

Filipino

0.00%

Common

Virgilio S. Jacinto

500 (of record)

Filipino

0.00%

Common

Jack G. Arroyo, Jr.

500 (of record)

Filipino

0.00%

Common

Consuelo M. Ynares-Santiago

500 (of record)

Filipino

0.00%

None of the members of the Board of Directors and Management of SMC Global Power own
2.0% or more of the outstanding capital stock of SMC Global Power.
(e)

Voting Trust Holders of 5% or more

SMC Global Power is not aware of any person holding more than 5% of common shares under a
voting trust or similar agreement.
(f)

Changes in Control

The Company is not aware of any change in control or arrangement that may result in a change
in control of the Company since the beginning of its last fiscal year.

140

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


The Company, in the ordinary course of business, has entered into transactions with
stockholders, affiliates and other related parties principally consisting of advances and
reimbursement of expenses, construction contracts, and development, management,
underwriting, marketing, leasing and administrative service agreements. Sale and purchase of
goods and services to and from related parties are made on an arms length basis and at current
market prices at the time of the transactions.
Except for the transactions discussed in Note 18 (Related Party Transactions) to the
accompanying financial statements, there were no other material related party transactions
during the last three financial years, nor are there any material transactions currently proposed
between SMC Global Power and any: (i) director or executive officer, direct or indirect owner of
10% or more of the outstanding shares in SMC Global Power ; (ii) close family member of such
director, executive officer or owner; (iii) associates of SMC Global Power; (iv) enterprises
controlling, controlled by or under common control with SMC Global Power; or (v) enterprises in
which a substantial interest in the voting power is owned, directly or indirectly, by any director,
executive officer or owner of 10% or more of the outstanding shares in SMC Global Power or
any close family member of such director, executive officer, or owner.

141

DESCRIPTION OF DEBT
U.S. $300 Million BDO Loan
On January 2011, the Company issued Notes with various international financial institutions for a
7% rate with an aggregate principal amount of U.S.$300 million and a tenor of five (5) years. The
same was refinanced on January 2016 via a short term loan from BDO.
As of the date of this Prospectus, the short term loan has an outstanding balance of U.S.$300
million.
U.S. $700 Million Term Facility
On September 2013, the Company entered into a five (5) year U.S.$700 million Term Facility
Agreement with SCB, Mega International Commercial Bank Co., Ltd. Offshore Banking Branch,
Chang Hwa Commercial Bank, Ltd. Singapore Branch, First Commercial Bank Offshore Banking
Branch, Taiwan Cooperative Bank Manila Offshore Banking Branch, The Bank of East Asia
Singapore Branch and Cathay Bank Hong Kong Branch. Events of default under the loan
include, among others, non-payment of any principal or interest due in respect of the loan, cross
default of any indebtedness, certain events related to insolvency or winding up of the Company,
and other events.
As of the date of this Prospectus, the Term Facility has an outstanding balance of U.S.$700
million.

142

CORPORATE GOVERNANCE
Manual on Corporate Governance
Pursuant to Article 9 of the Revised Code of Corporate Governance, the Manual on Corporate
Governance (the Manual) of the Company was approved by the Board of Directors on August
19, 2011, and was amended on April 11, 2016.
Compliance and Monitoring System
The monitoring of the implementation of the evaluation system of the Company to measure and
determine the adherence to and the level of compliance of the Board of Directors and top level
management with the Manual is vested by the Board of Directors in the Compliance Officer. To
ensure adherence to corporate governance principles and best practices, the Board of Directors
will appoint a Compliance Officer in due course.
The Compliance Officer is responsible for monitoring compliance by the Company with the
provisions and requirements of the Manual and the rules and regulations of the relevant
regulatory agencies and ensures adherence to corporate principles and best practices. The
Compliance Officer holds the position of a Vice President or its equivalent and has direct
reporting responsibilities to the Chairman of the Board of Directors. In accordance with
applicable rules and regulations of the SEC, the Compliance Officer shall certify whether the
Company has substantially adopted all the provisions of the Manual on Corporate Governance.
Further, the Company may organize regular seminars or programs on Corporate Governance for
directors and key officers, in accordance with SEC regulations.
Pursuant to its commitment to good governance and business practice, the Company shall
continue to review and strengthen its policies and procedures, giving due consideration to
developments in the area of corporate governance which it determines to be in the best interests
of the Company and its stockholders.
Independent Directors
Under the implementing rules and regulations of the SRC, an independent director is defined as
a person who, apart from his fees and shareholdings, is independent of management and free
from any business or other relationship which could, or could reasonably be perceived to,
materially interfere with his exercise of independent judgment in carrying out his responsibilities
as a director. An independent director must satisfy the qualifications and must have none of the
disqualifications of an independent director set out in the SRC and its implementing rules and
regulations, the Manual, the Amended Articles of Incorporation and Amended By-Laws of the
Company.
Under the SRC, the Company is required to have at least two (2) independent directors in its
Board of Directors. The Manual, in turn, requires at least two (2) independent directors to serve
on the Audit Committee of the Company and one independent director on each of the
Nomination and Hearing Committee and Executive Compensation Committee.
Justice Consuelo M. Ynares-Santiago and Dr. Jack G. Arroyo, Jr. are the independent directors
of the Company.

143

Board Committees
Audit Committee
The Audit Committee of SMC Global Power shall be composed of at least three (3) directors,
including the two (2) independent directors.
The Audit Committee is responsible for assisting the Board of Directors in the performance of its
oversight responsibility for financial reports and financial reporting process, internal control
system, audit process, and in monitoring and facilitating compliance with both the internal and
financial management handbook and pertinent accounting standards, legal and regulatory
requirements. It performs financial oversight management functions, specifically in the areas of
managing credit, market liquidity, operational, legal and other risks of SMC Global Power, and
crisis management.
On June 7, 2016, the Board of Directors of the Company approved the charter of the Audit
Committee. The members of the Audit Committee are Ferdinand K. Constantino, Alan T. Ortiz,
Jack G. Arroyo, Jr. and Consuelo M. Ynares-Santiago.
Nomination and Hearing Committee
The Nomination and Hearing Committee of SMC Global Power shall have at least three (3)
voting directors, at least one (1) of whom shall be an independent director.
The committee is responsible for making recommendations to the Board of Directors on matters
relating to the Directors appointment, election and succession, with the view of appointing
individuals to the Board of Directors with relevant experience and capabilities to maintain and
improve the competitiveness of the Company and increase its value. It prescreens and shortlists
the nominees in accordance with the qualifications and disqualifications for directors set out in
the Manual.
On June 7, 2016, the Board of Directors of the Company approved the charter of the Nomination
and Hearing Committee. The members of the Nomination and Hearing Committee are Consuelo
M. Ynares-Santiago, Alan T. Ortiz, Virgilio S. Jacinto and Elenita D. Go.
Executive Compensation Committee
The Executive Compensation Committee of SMC Global Power shall be composed of at least
three (3) members, one (1) of whom shall be an independent director.
The committee is responsible for advising and assisting the Board of Directors in the
establishment of formal and transparent procedure for developing a policy on executive
remuneration and for fixing the remuneration packages of the officers and directors of SMC
Global Power, and provides oversight over remuneration of senior management and other key
personnel, ensuring that compensation is consistent with the culture, strategy and control
environment of the Company. It designates the amount of remuneration, which shall be in a
sufficient level to attract and retain directors and officers who are needed to run SMC Global
Power successfully.
On June 7, 2016, the Board of Directors of the Company approved the charter of the Executive
Compensation Committee. The members of the Executive Compensation Committee are Aurora
T. Calderon, Ferdinand K. Constantino, and Jack G. Arroyo, Jr.

144

REGULATORY FRAMEWORK
ORGANIZATION AND OPERATION OF THE POWER INDUSTRY
The EPIRA established a framework for the organization, operation and restructuring of the
electric power industry, with the industry divided into four sectors: generation, transmission,
distribution and supply. The following diagram shows the current structure of the electric power
industry under the EPIRA.
Industry structure under the EPIRA:
JCPC

ERC

PSALM

DOE

NEA

NPC

Industry Participants

WESM

SPUG
Suppliers/
Aggregators

GENCOs

Transco

Oversight

Regulation

Supervision

Policy making

Coordination

Competitive

Ownership Control

Regulated

DUs
PUs

ECs

_______________
Note:
DUs: Distribution Utilities
ECs: Electric Cooperatives
GENCOs: Any entity authorized by the ERC to operate electricity generation facilities
JCPC: Joint Congressional Power Commission
PUs: Production Utilities

Through the EPIRA, the Government instituted major reforms with the goal of fully privatizing all
aspects of the power industry. The principal objectives of the EPIRA are:

to ensure and accelerate the total electrification of the country;

to ensure the quality, reliability, security and affordability of the supply of electric power;

to ensure transparent and reasonable prices of electricity in a regime of free and fair
competition and full public accountability to achieve greater operational and economic
efficiency and enhance the competitiveness of Philippine products in the global market;

to enhance the inflow of private capital and to broaden the ownership base of the
power generation, transmission and distribution sectors;

to ensure fair and non-discriminatory treatment of public and private sector entities in
the process of restructuring the electric power industry;

to protect the public interest as it is affected by the rates and services of electric utilities
and other providers of electric power;

to ensure socially and environmentally compatible energy sources and infrastructure;


145

to promote the utilization of indigenous and new and renewable energy resources in
power generation in order to reduce dependence on imported energy;

to provide for an orderly and transparent privatization of the assets and liabilities of NPC;

to establish a strong and purely independent regulatory body and system to ensure
consumer protection and enhance the competitive operation of the electricity market; and

to encourage the efficient use of energy and other modalities of demand side management.

With a view to implementing these objectives, the DOE, in consultation with the relevant
Government agencies, electric power industry participants, non-Government organizations and
electricity consumers, promulgated the Implementing Rules and Regulations (the IRR) of the
EPIRA on February 27, 2002.
The IRR governs the relations between, and respective responsibilities of, the different electric
power industry participants as well as the particular Governmental authorities involved in
implementing the structural reforms in the industry, namely the DOE, NPC, National
Electrification Administration (NEA), ERC and PSALM.
Reorganization of the Electric Power Industry
Of the many changes initiated by the EPIRA, of primary importance is the reorganization of the
electric power industry by segregating the industry into four sectors: (i) the generation
sector; (ii) the transmission sector; (iii) the distribution sector; and (iv) the supply sector. The
goal is for the generation and supply sectors to be fully competitive and open, while the
transmission and distribution sectors will remain regulated as public utilities. Prior to the EPIRA,
the industry was regulated as a whole, with no clear distinctions between and among the various
sectors and/or services.
The Generation Sector
Under the EPIRA, power generation per se is not a public utility operation. Thus, generation
companies are not required to secure congressional franchises, and there are no restrictions
on the ability of non-Filipinos to own and operate generation facilities. However, generation
companies must obtain a certificate of compliance from the ERC, as well as health, safety and
environmental clearances from appropriate Government agencies under existing laws.
Furthermore, PPAs and PSAs between generation companies and distribution utilities are
subject to the review and approval of the ERC. Generation companies are also subject to the
rules and regulations of the ERC on abuse of market power and anticompetitive behavior. In
particular, the ERC has the authority to impose price controls, issue injunctions, require
divestment of excess profits and impose fines and penalties for violation of the EPIRA and the
IRR policy on market power abuse, cross-ownership and anti-competitive behavior.
The goal of the EPIRA is for the generation sector to be open and competitive, while the
private sector is expected to take the lead in introducing additional generation capacity.
Generation companies will compete either for bilateral contracts with various RESs, electric
cooperatives and private distribution utilities, or through spot sale transactions in the WESM.
With the implementation of RCOA in Luzon and Visayas, generation companies are already able
to sell electricity to eligible end-users. Open Access is defined under the IRR as the system of
allowing any qualified person the use of electric power transmission and distribution systems;
while Retail Competition is defined as the provision of electricity to a Contestable Market (i.e.,
electricity end-users with monthly average peak demand of at least 1MW for the preceding 12
months to the initial implementation of Open Access, which shall be reduced to 750 KW two
years thereafter) by persons authorized by the ERC to engage in the business of supply to
electricity end-user through Open Access.
Recovery by distribution utilities of their purchased power cost is subject to review by the ERC
to determine reasonableness of the cost and to ensure that the distribution utilities do not earn
any revenue therefrom. With the commencement of the RCOA, generation rates, except those
146

intended for such end-users who may not choose their supplier of electricity (the Captive
Market), ceased to be regulated.
The generation sector converts fuel and other forms of energy into electricity. It consists of
the following: (i) NPC-owned-and-operated generation facilities; (ii) NPC-owned plants, which
consist of plants operated by IPPs, as well as IPP-owned-and-operated plants, all of which
supply electricity to NPC; and (iii) IPP-owned-and-operated plants that supply electricity to
customers other than NPC.
Under the EPIRA, generation companies are allowed to sell electricity to distribution utilities or to
RESs through either bilateral contracts or the WESM as described below. With the
implementation of RCOA on December 26, 2013, as supplemented by DOE Department Circular
No. DC2015-06-0010, generation companies may likewise sell electricity to eligible end-users
with an average monthly peak demand of 750 kW and certified by the ERC to be Contestable
Customers.
No generation company or related group is allowed to own more than 30% of the installed
generating capacity of the Luzon, Visayas or Mindanao grids and/or 25% of the national
installed generating capacity. Also, no generation company associated with a distribution utility
may supply more than 50% of the distribution utilitys total demand under bilateral contracts,
without prejudice to the bilateral contracts entered into prior to the effectiveness of the EPIRA.
Historically, the generation sector has been dominated by NPC. To introduce and foster
competition in the sector, and, more importantly, to lessen the debt of NPC, the EPIRA
mandates the total privatization of the generation assets and IPP contracts of NPC, which
exclude the assets devoted to missionary electrification through the small power utilities group
of NPC. NPC is directed to transfer ownership of all the assets for privatization to a
separate entity, PSALM, which is specially tasked to manage the privatization. Beginning early
2004, PSALM has been conducting public bidding for the generation facilities owned by NPC.
As of December 31, 2015, PSALM has privatized 22 operating/generating power facilities and
decommissioned three (3) generating power facilities, with a total combined capacity of 4,
568.43 MW. Moreover, additional seven (7) power plants with total combined capacity of 3,
607.42 MW were privatized through IPPA contracts. Major generation assets sold include the
748 MW Tiwi-Makban geothermal power plant, the 600 MW Batangas (Calaca) coal-fired
thermal power plant, the 600 MW Masinloc coal fired power plant, the 360 MW Magat
hydroelectric power plant, and the 305 MW Palinpinon-Tongonan geothermal power plant.
Among the capacities privatized through IPPA Agreements include the 95.52 Mindanao I and II
(Mt. Apo 1 and 2) geothermal power plants, 1,000 MW Sual coal-fired power plant, the 700 MW
Pagbilao coal-fired power plant, the 345 MW of the San Roque Power Plant, the 70 MW Bakun
hydroelectric power plant, the 200 MW Unified Leyte Geothermal Power Plant, and the 1,200
MW Ilijan combined-cycle gas-fired power plant.
Section 47(j) of the EPIRA prohibits NPC from incurring any new obligations to purchase
power through bilateral contracts with generation companies or other suppliers. Also, NPC is
only allowed to generate and sell electricity from generating assets and IPP contracts that have
not been disposed of by PSALM.
Generation companies which are not publicly listed are required to offer and sell to the public a
portion of not less than 15% of their common shares of stock.
The Transmission Sector
Pursuant to the EPIRA, NPC has transferred its transmission and sub-transmission assets to
TransCo, which was created pursuant to the EPIRA to assume, among other functions, the
electrical transmission function of the NPC. The principal function of TransCo is to ensure and
maintain the reliability, adequacy, security, stability and integrity of the nationwide electrical grid
in accordance with the Philippine Grid Code (Grid Code). TransCo is also mandated to
provide open and non-discriminatory access to its transmission system to all electricity users.
147

The transmission of electricity through the transmission grid is subject to transmission wheeling
charges. As the transmission of electric power is a regulated common carrier business,
TransCos transmission wheeling charges are subject to regulation and approval by the ERC.
The EPIRA also requires the privatization of TransCo through an outright sale of, or the grant of,
a concession over the transmission assets while the sub-transmission assets of TransCo are
to be offered for sale to qualified distribution utilities. In December 2007, NGCP, comprising a
consortium of Monte Oro Grid Resources, Calaca High Power Corporation and State Grid
Corporation of China, won the concession contract to operate, maintain and expand the
TransCo assets with a bid of U.S.$3.95 billion. On January 15, 2009, NGCP was officially
granted the authority to operate the sole transmission system of the country pursuant to a
legislative franchise granted by the Philippine Congress under Republic Act No. 9511.
The Grid Code establishes the basic rules, requirements, procedures and standards that govern
the operation, maintenance and development of the Philippine grid, or the high-voltage
backbone transmission system and its related facilities. The Grid Code identifies and provides
for the responsibilities and obligations of three key independent functional groups, namely: (a)
the grid owner, or TransCo; (b) the system operator, or NGCP as the current concessionaire of
TransCo; and (c) the market operator, or the PEMC. These functional groups, as well as all
users of the grid, including generation companies and distribution utilities, must comply with the
provisions of the Grid Code as promulgated and enforced by the ERC.
In order to ensure the safe, reliable and efficient operation of the Philippine grid, the Grid Code
provides for, among others, the following regulations:

the establishment of a grid management committee, which is tasked with the monitoring
of the day-to-day operation of the grid;

performance standards for the transmission of electricity through the grid, as well as
the operation and maintenance thereof, which standards shall apply to TransCo, NGCP,
distribution utilities and suppliers of electricity;

technical and financial standards and criteria applicable to users of the grid, including
generation companies and distribution utilities connected or seeking to connect thereto;
and

other matters relating to the planning, management, operation and maintenance of the
grid.

The Distribution Sector


The distribution of electric power to end-users may be undertaken by private distribution utilities,
cooperatives, local Government units presently undertaking this function, and other duly
authorized entities, subject to regulation by the ERC. The distribution business is a regulated
public utility business requiring a franchise from the Philippine congress, although franchises
relating to electric cooperatives remained under the jurisdiction of the NEA until the end of
2006. All distribution utilities are also required to obtain a certificate of public convenience and
necessity from the ERC to operate as public utilities.
They are also required to submit to the ERC a statement of their compliance with the technical
specifications prescribed in the Philippine Distribution Code (Distribution Code) (which
provides the rules and regulations for the operation and maintenance of distribution systems),
the Distribution Services and Open Access Rules and the performance standards set out in the
IRR of the EPIRA.
The distribution sector is regulated by the ERC, with distribution and wheeling charges, as
well as connection fees from its consumers, subject to ERC approval. The retail rate imposed
by distribution utilities for the supply of electricity to its captive consumers is also subject to ERC
approval. In addition, as a result of the policy of the Government in promoting free competition
and Open Access, distribution utilities are now required to provide universal and non148

discriminatory access to their systems within their respective franchise areas following
commencement of the RCOA.
The Distribution Code establishes the basic rules and procedures that govern the operation,
maintenance, development, connection and use of the electric distribution systems in the
Philippines. The Distribution Code defines the technical aspects of the working relationship
between the distributors and all the users of the distribution system, including distribution
utilities, embedded generators and large customers. All such electric power industry participants
in distribution system operations are required to comply with the provisions of the Distribution
Code as promulgated and enforced by the ERC.
To ensure the safe, reliable and efficient operation of distribution systems in the Philippines,
the Distribution Code provides for, among others, the following regulations:

technical, design and operational criteria and procedures to be complied with by any
user who is connected or seeking connected to a distribution system;

performance and safety standards for the operation of distribution systems applicable
to distributors and suppliers; and

other matters relating to the planning, development, management, operation and


maintenance of distribution systems.

The Supply Sector


The supply of electricity refers to the sale of electricity directly to end-users. The supply function
used to be undertaken solely by franchised distribution utilities. However, with the
commencement of the RCOA, the supply function has become competitive. The retail supply
business is not considered a public utility operation and suppliers are not required to obtain
franchises. However, the supply of electricity to a market of end-users who have a choice
on their supplier of electricity is considered a business affected with public interest. As such,
the EPIRA requires all RESs to obtain a license from the ERC and they are subject to the rules
and regulations of the ERC on the abuse of market power and other anti-competitive or
discriminatory behavior.
An RES may only sell up to 50% of its total capacity to all of its end-user affiliates, and in no
case shall an RES and affiliate RES, acting singly or collectively as one or as an aggregate, be
allowed to purchase more than 50% of their capacity requirements from their affiliate generation
companies.
With the RCOA already implemented, the RES license will allow generation companies to enter
into retail electricity supply agreements with Contestable Customers. This will encourage
competition at the retail level and it is planned that retail competition will gradually increase over
time, provided that supply companies are sufficiently creditworthy to be suitable offtakers for
generation companies.
The following table summarizes the power supply and demand outlook from 2012 to 2030 in
Philippines based on the DOE Power Development Plan, 2012-2030:

Grid

Installed Dependable Available


capacity
capacity
capacity
(MW)
(MW)
peak (MW)

Luzon . . . . . . . . . . . . . . . . . . . . . . . . 11,739
.Visayas
..
. . . . . . . . . . . . . . . . . . . . . . . 2,402
.Mindanao
.
. . . . . . . . . . . . . . . . . . . . . 2,022
.Philippines
..
. . . . . . . . . . . . . . . . . . . . 16,162
...

10,824
2,037
1,616
14,477

(1) Curtailed demand for Mindanao grid.

149

8,944
1,731
1,311
11,986

Peak
(MW)

7,889
1,522
1,257(1
)

Actual
peak (MW)

Required
reserve
margin
(MW)

1,055
312
50

1,610
261
250

Role of the ERC


The ERC is the independent, quasi-judicial regulatory body created under the EPIRA that
replaced the Energy Regulatory Board. The ERC plays a significant role in the restructured
industry environment, consisting of, among others, promoting competition, encouraging market
development, ensuring consumer choice and penalizing abuse of market power by industry
participants.
Among the primary powers and functions of the ERC are:

to determine, fix and approve, after conducting public hearings, transmission and
distribution and wheeling charges and retail rates and to fix and regulate the rates and
charges to be imposed by distribution utilities and their captive end-users, including selfgenerating entities;

to grant, revoke, review or modify the certificates of compliance required of generation


companies and the licenses required of suppliers of electricity in the Contestable
Market;

to enforce the Grid Code and Distribution Code, which shall include performance
standards, the minimum financial capability standards, and other terms and conditions
for access to and use of transmission and distribution facilities;

to enforce the rules and regulations governing the operations of the WESM and the
activities of the WESM operator to ensure a greater supply and rational pricing of
electricity;

to ensure that the electric power industry participants and NPC functionally and
structurally unbundled their respective business activities and rates and to determine
the levels of cross-subsidies in the existing and retail rates until the same is removed in
accordance with the different sectors;

to set a lifeline rate for marginalized end-users;

to promulgate rules and regulations prescribing the qualifications of suppliers which


shall include, among others, their technical and financial capability and creditworthiness;

to determine the electricity end-users comprising the contestable and Captive Markets;

to fix user fees to be charged by TransCo/NGCP for ancillary services to all electric
power industry participants or self-generating entities connected to the grid;

to review all power purchase contracts executed between NPC and IPPs, including the
distribution utilities;

to monitor and adopt measures to discourage or penalize abuse of market power,


cartelization and any anticompetitive or discriminatory behavior by any electric power
industry participant;

to review and approve the terms and conditions of service of TransCo/NGCP and any
distribution utility or any changes therein;

to perform such other regulatory functions as are appropriate and necessary in order to
ensure the successful restructuring and modernization of the electric power industry;
and

to have original and exclusive jurisdiction over all cases that involve the contesting of
rates, fees, fines and penalties imposed in the exercise of its powers, functions and
responsibilities and over all cases involving disputes between and among participants or
players in the energy industry relating to the foregoing powers, functions and
responsibilities.

150

Role of the DOE


In accordance with its mandate to supervise the restructuring of the electric power industry,
the DOE exercises, among others, the following functions:

preparation and annual updating of the Philippine Energy Plan and the Philippine
Power Development Program, and thereafter integrate the latter into the former;

ensuring the reliability, quality and security of the supply of electric power;

exercise of supervision and control over all Government activities pertaining to energy
projects;

encouragement of private investment in the power industry and promotion of the


development of indigenous and renewable energy sources for power generation;

facilitation of reforms in the structure and operation of distribution utilities for greater
efficiency and lower costs;

promotion of incentives to encourage industry participants, including new generating


companies and end-users, to provide adequate and reliable electric supply;

education of the public (in coordination with NPC, ERC, NEA and the Philippine
Information Agency) on the restructuring of the industry and the privatization of NPC
assets; and

establishment of the WESM in cooperation with electric power industry participants, and
formulating rules governing its operations.

Role of the Joint Congressional Power Commission


The Joint Congressional Power Commission created pursuant to the EPIRA consists of 14
members selected from the members of the Philippine Senate and House of Representatives.
Its responsibilities and functions include, among others, the following:

monitoring and ensuring the proper implementation of the EPIRA;

endorsement of the initial privatization plan of PSALM for approval by the President of
the Philippines;

ensuring transparency in the public bidding procedures adopted for the privatization of
the generation and transmission assets of NPC;

evaluation of the adherence of industry participants to the objectives and timelines


under the EPIRA; and

recommendation of necessary remedial legislation or executive measures to correct the


inherent weaknesses in the EPIRA.

Competitive Market Devices


WESM
The EPIRA mandates the establishment of the WESM, which is a pre-condition for the
implementation of the RCOA, within one year from its effectivity. The WESM provides a venue
whereby generators may sell power, and at the same time, suppliers and wholesale
consumers can purchase electricity where no bilateral contract exists between the two.
The rules and regulations of WESM set the guidelines and standards for participation in the
market, reflecting accepted economic principles and providing a level playing field for all electric
power industry participants, and procedures for establishing the merit order dispatch for each
151

time (hourly) trading period. These rules also provide for a mechanism for setting electricity
prices that are not covered by bilateral contracts between electricity buyers and sellers.
On November 18, 2003, upon the initiative of the DOE, the PEMC was incorporated as a nonstock, non-profit corporation with membership comprising an equitable representation of
electricity industry participants and chaired by the DOE. The PEMC acts as the autonomous
market group operator and the governing arm of the WESM and was tasked to undertake the
preparatory work for the establishment of the WESM, pursuant to Section 30 of the EPIRA
and in accordance with the WESM Rules. Its primary purpose is to establish, maintain,
operate and govern an efficient, competitive, transparent and reliable market for the wholesale
purchase of electricity and ancillary services in the Philippines in accordance with relevant laws,
rules and regulations.
The WESM became operational in the Luzon grid on June 26, 2006. The Visayas Grid was
integrated into the WESM on December 26, 2010.
As of March 23, 2016, there were 755 entities registered as WESM.
Interim Mindanao Electricity Market
The Philippines does not have an integrated grid, and instead has two major regional grids (the
integrated Luzon-Visayas grid, and the Mindanao grid) and small islands with isolated grids.
Compared to Luzon and Visayas, the Mindanao grid suffers from intermittent outages lasting
from two to six hours. Recognizing the urgent need to address the current supply shortage in
Mindanao, the DOE directed PEMC to develop and implement an interim electricity market
design for Mindanao, known as the Interim Mindanao Electricity Market (IMEM).
The IMEM is a venue for the transparent and efficient utilization of all available capacities in the
Mindanao grid and is an immediate solution meant to address the deficiency of electricity supply
in Mindanao. It will serve as a trading platform where entities with excess capacities will sell in
the IMEM, subject to compensation based on the price determination mechanism duly approved
by the ERC. The full commercial operations of the IMEM commenced on December 3, 2013.
Since February 27, 2014, however, the IMEM has been under market intervention as initiated by
the PEMC due to the Mindanao grid system blackout.
RCOA
The EPIRA likewise provides for a system of Open Access on transmission and distribution
wires, whereby TransCo/NGCP and distribution utilities may not refuse the use of their wires by
qualified persons, subject to the payment of distribution and wheeling charges. The full
commercial operation of RCOA in Luzon and Visayas commenced on June 26, 2013 with a total
of 275 registered participants. Conditions for the commencement of such Open Access system
are as follows:

establishment of the WESM;

approval of unbundled transmission and distribution wheeling charges;

initial implementation of the cross-subsidy removal scheme;

privatization of at least 70% of the total capacity of generating assets of NPC in Luzon
and Visayas; and

transfer of the management and control of at least 70% of the total energy output of
power plants under contract with NPC to the IPPAs.

On June 6, 2011, pursuant to Resolution No. 10, Series of 2011, the ERC declared December
26, 2011 as the Open Access Date to mark the commencement of the full operations of the
competitive retail electricity market in Luzon and Visayas. Accordingly, all electricity-end users
152

with an average monthly peak demand of one MW for the 12 months preceding the Open
Access Date, as certified by the ERC to be Contestable Customers, shall have the right to
choose their own electricity suppliers.
To ensure smooth transition from the existing structure to RCOA, the ERC promulgated
Resolution No. 16, Series of 2012, providing for a transition period from December 26, 2012 until
June 25, 2013. However, the ERC effectively extended the transition period when it issued
Resolution No. 11, Series of 2013, which allowed Contestable Customers to stay with their
current distribution utility until December 25, 2013, or until such time that they were able to find
an RES. On June 19, 2015, the Department of Energy promulgated Department Circular No.
DC2015-06-0010, which mandated Contestable Customers to secure their retail supply
contracts by June 25, 2016, including Contestable Customers with an average demand of
750KW to 999KW for the 12-month period preceding June 25, 2016.
With the implementation of the RCOA, the Contestable Markets (i.e., end-users with an average
monthly peak demand of 750 kW as certified by the ERC) may choose where to source their
electric power requirements and can negotiate with suppliers for their electricity. Likewise,
certain end-users will be allowed to directly source power through the WESM or by entering into
contracts with generation companies. This will encourage competition at the retail level and it is
anticipated that retail competition will gradually increase over time, provided that supply
companies are sufficiently creditworthy to be suitable offtakers for generation companies.
With the implementation of the RCOA, certain contracts entered into by utilities and suppliers
may potentially be stranded. Stranded contract cost refers to the excess of the contracted cost
of electricity under eligible contracts of NPC over the actual selling price of the contracted
energy output of such contracts in the market. Under the EPIRA, recovery of stranded contract
cost may be allowed provided that such contracts were approved by the Energy Regulatory
Board (now the ERC) as of December 31, 2000.
Unbundling of Rates and Removal of Cross Subsidies
The EPIRA mandates that distribution and wheeling charges be unbundled from retail rates and
that rates reflect the respective costs of providing each service. The EPIRA also states that
cross-subsidies shall be phased out within a period not exceeding three years from the
establishment by the ERC of a universal charge, which shall be collected from all electricity
end-users. However, the ERC may extend the period for the removal of the cross-subsidies
for a maximum of one year if it determines that there will be a material adverse effect upon the
public interest or an immediate, irreparable and adverse financial effect on a distribution utility.
These arrangements are now in place, in satisfaction of the conditions for the RCOA.
The EPIRA likewise provides for a socialized pricing mechanism called a lifeline rate to be set
by the ERC for marginalized or low-income captive electricity consumers who cannot afford to
pay the full cost of electricity. These end-users are exempt from the cross-subsidy removal for a
period of ten years, unless extended by law.
Implementation of the Performance-Based Regulation (PBR)
The ERC issued the Rules for Setting Distribution Wheeling Rates that apply to privately owned
distribution utilities entering PBR, which set out the manner in which the new PBR ratesetting mechanism for distribution-related charges will be implemented. PBR is intended to
replace the return-on-rate-base regulation that has historically determined the distribution
charges paid by the distribution companies customers. Under the PBR, the distribution-related
charges that distribution utilities can collect from customers over a four-year regulatory period
will be set by reference to projected revenues which are reviewed and approved by the ERC
and used by the ERC to determine the efficiency factor of a distribution utility. For each year
during the regulatory period, the distribution charge of a distribution utility is adjusted upwards or
downwards taking into consideration the efficiency factor of the utility set against changes in
overall consumer prices in the Philippines. The ERC has also implemented a performance
153

incentive scheme whereby annual rate adjustments under PBR will also take into consideration
the ability of a distribution utility to meet or exceed service performance targets set by the ERC,
such as the average duration of power outages, the average time to provide connections to
customers and the average time to respond to customer calls, with utilities being rewarded or
penalized depending on their ability to meet these performance targets.
Reduction of Taxes and Royalties on Indigenous Energy Resources
To equalize prices between imported and indigenous fuels, the EPIRA mandates the President
of the Philippines to reduce the royalties, returns and taxes collected for the exploitation of all
indigenous sources of energy, including but not limited to, natural gas and geothermal steam, so
as to effect parity of tax treatment with the existing rates for imported coal, crude oil, bunker
fuel and other imported fuels. Following the promulgation of the IRR, then President Arroyo
issued Executive Order No. 100 to equalize the taxes among fuels used for power generation.
This mechanism, however, is yet to be implemented.
Government Approval Process
As set forth in the EPIRA, power generation is not considered a public utility operation. Thus,
an entity engaged or intending to engage in the generation of electricity is not required to secure
a franchise. However, no person or entity may engage in the generation of electricity unless
such person or entity has complied with the standards, requirements and other terms and
conditions set by the ERC and has received a certificate of compliance from the ERC to
operate facilities used in the generation of electricity. A certificate of compliance is valid for a
period of five years from the date of issuance.
In addition to the certificate of compliance requirement, a generation company must comply with
technical, financial capability and environmental standards. A generation company must ensure
that all its facilities connected to the grid meet the technical design and operational criteria of
the Grid Code and Distribution Code promulgated by the ERC. In this connection, the ERC
has issued guidelines setting the minimum financial capability standards for generation
companies. Under the guidelines, a generation company is required to meet a minimum annual
interest cover ratio or debt service capability ratio of 1.5x throughout the period covered by its
certificate of compliance. For certificate of compliance applications and renewals, the guidelines
require the submission to the ERC of, among other things, comparative audited financial
statements, a schedule of liabilities, and a five-year financial plan. For the duration of the
certificate of compliance, the guidelines also require a generation company to submit audited
financial statements and forecast financial statements to the ERC for the next two financial
years, as well as other documents. The failure by a generation company to submit the
requirements prescribed by the guidelines may be grounds for the imposition of fines and
penalties.
With the introduction of RCOA, the rates charged by a generation company are no longer
regulated by the ERC, except rates for Captive Markets (as determined by the ERC). In addition,
since the establishment of the WESM, generation companies are now required to comply with
the membership criteria and appropriate dispatch scheduling as prescribed under the WESM
Rules.
In the course of developing a power plant, other permits, approvals and consents must also be
obtained from relevant national, provincial and local Government authorities, relating to, among
others, site acquisition, construction and operation, including environmental-related licenses and
permits.

154

Registration under the Board of Investments


Under the Executive Order No. 226, otherwise known as the Omnibus Investments Code, a
Board of Investments (BOI)-registered enterprise enjoy certain incentives provided such
enterprise invests in preferred areas of investment enumerated in the Investment Priorities Plan
annually prepared by the Government. However, prior to registration with the BOI, the enterprise
must first satisfy the minimum equity required to finance the project applied equivalent to 25% of
the estimated project cost, or as may be prescribed by the BOI.
Such incentives may include: (i) income tax holiday; (ii) additional deduction for labor expenses;
(iii) tax exemption on imported capital equipment; (iv) tax credit on domestic capital equipment;
(v) exemption from contractors tax; (vi) simplification of customs procedure; (vii) unrestricted use
of consigned equipment; (viii) employment of foreign nationals; (ix) tax exemption on imported
spare parts; and (x) exemption from wharfage dues and export duties and fees.
Philippine Competition Act
On July 21, 2015, the President of the Philippines signed into law Republic Act No. 10667 or the
Philippine Competition Act, which became effective on August 8, 2015. It aims to enhance
economic efficiency and promote free and fair competition in trade, industry and all commercial
economic activities, prevent economic concentration which will manipulate or constrict the
discipline of free markets, and penalize all forms of anticompetitive agreements, abuse of
dominant position and anti-competitive mergers and acquisitions, with the objective of protecting
consumer welfare and advancing domestic and international trade and economic development.
Although the Philippine Competition Act is silent on its applicability specifically to the electric
power industry, Section 55(c) of the Philippine Competition Act provides that insofar as Section
43(u) of the EPIRA is inconsistent with provisions of the Philippine Competition Act, it shall be
repealed. In view of this, the Philippine Competition Commission now has the original and
exclusive jurisdiction over all cases contesting rates, fees, fines and penalties imposed by the
ERC in the exercise of its powers, functions and responsibilities and over all cases involving
disputes between and among participants or players in the energy sector. The Implementing
Rules and Regulations for the Philippine Competition Act have not yet been issued as of the
date of this Offering Circular.
Local Government Code
Republic Act No. 7160, otherwise known as the Local Government Code (LGC) establishes the
system and powers of provincial, city, municipal, and barangay governments in the country. The
LGC general welfare clause states that every local government unit (LGU) shall exercise the
powers expressly granted, those necessarily implied, as well as powers necessary, appropriate,
or incidental for its efficient and effective governance, and those which are essential to the
promotion of the general welfare.
The power to tax and police power is exercised by the LGU through their respective legislative
bodies. Specifically, the LGU, through its legislative body, has the authority to enact such
ordinances as it may deem necessary and proper for sanitation and safety, the furtherance of
the prosperity, and the promotion of the morality, peace, good order, comfort, convenience, and
general welfare of the locality and its inhabitants. Ordinances can reclassify land, impose real
property taxes, order the closure of business establishments, and require permits and licenses
from businesses operating within the territorial jurisdiction of the LGU.
Labor and Employment
The Department of Labor and Employment (DOLE) is the Philippine government agency
mandated to formulate policies, implement programs and services, and serves as the policycoordinating arm of the Executive Branch in the field of labor and employment. The DOLE has
exclusive authority in the administration and enforcement of labor and employment laws such as
the Labor Code of the Philippines and the Occupational Safety and Health Standards, as
amended, and such other laws as specifically assigned to it or to the Secretary of the DOLE.
155

Social Security System, PhilHealth and the Pag-IBIG Fund


An employer or any person who uses the services of another person in business, trade, industry
or any undertaking is required under the Social Security Act of 1997 to ensure coverage of
employees following procedures set out by the law and the Social Security System (SSS).
Under the said law, an employer must deduct from its employees their monthly contributions
based on a given schedule, pay its share of contribution and remit these to the SSS within a
period set by law and/ or SSS regulations.
Employers are likewise required to ensure enrollment of its employees in a National Health
Program administered by the Philippine Health Insurance Corporation a government corporation
attached to the DOH tasked with ensuring sustainable, affordable and progressive social health
insurance pursuant to the provisions of the National Health Insurance Act of 1995.
Under the Home Development Mutual Fund Law of 2009, all employees who are covered by the
Social Security Act of 1997 must also be registered with and covered by the Home Development
Mutual Fund, more commonly referred to as the Pag-IBIG Fund.
Environmental Matters
Presidential Decree No. 1586 established the Environmental Impact Statement System, which
provides a regulatory framework for any project or undertaking that is either (a) classified as
environmentally critical or (b) is situated in an environmentally critical area. The Department of
Environment and Natural Resources (DENR), through its regional offices or through the
Environmental Management Bureau (the EMB), determines whether a project is
environmentally critical or located in an environmentally critical area and processes all
applications for an ECC.
The law requires an entity that will undertake any such declared environmentally critical project
or operate in any such declared environmentally critical area to submit an Environmental Impact
Statement (EIS) which is a comprehensive study of the significant impacts of a project on the
environment. The EIS serves as an application for the issuance of an ECC, if the proposed
project is environmentally critical or situated in an environmentally critical area; or for the
issuance of a Certificate of Non-Coverage, if otherwise. An ECC is a Government certification
that, among others, (i) the proposed project or undertaking will not cause significant negative
environmental impact; (ii) the proponent has complied with all the requirements of P.D No. 1586
in connection with the project; and (iii) the proponent is committed to implement its approved
Environmental Management Plan (EMP) in the EIS. The EMP details the prevention, mitigation,
compensation, contingency and monitoring measures to enhance positive impacts and minimize
negative impacts and risks of a proposed project or undertaking.
Project proponents that prepare an EIS are required to establish an Environmental Guarantee
Fund when the ECC is issued for projects determined by the DENR to pose a significant public
risk to life, health, property and the environment or where the project requires rehabilitation or
restoration. The Environmental Guarantee Fund is intended to meet any damage caused by
such a project as well as any rehabilitation and restoration measures. Project proponents also
required to establish an Environmental Monitoring Fund (EMF) when an ECC is eventually
issued. The EMF is to support the activities of the team monitoring the project proponent's
compliance with ECC conditions, EMP and applicable laws, rules and regulations.
The operation of power plants are considered environmentally critical projects for which an EIS
and an ECC are mandatory.
The Clean Water Act
The Clean Water Act and its implementing rules and regulations provide for water quality
standards and regulations for the prevention, control, and abatement of pollution of the water
resources of the country. The Clean Water Act requires owners or operators of facilities that
discharge regulated effluents (such as wastewater from manufacturing plants or other
156

commercial facilities) to secure a discharge permit from the DENR which authorizes the owners
and operators to discharge waste and/or pollutants of specified concentration and volumes from
their facilities into a body of water or land resource for a specified period of time. The DENR,
together with other Government agencies and the different local Government units, is tasked to
implement the Clean Water Act and to identify existing sources of water pollutants, as well as
strictly monitor pollution sources which are not in compliance with the effluent standards
provided in the law.
The Clean Air Act
Pursuant to the Clean Air Act and its implementing rules and regulations, enterprises that
operate or utilize air pollution sources are required to obtain an Authority to Construct or a Permit
to Operate from the DENR with respect to the construction or the use of air pollutants. The
issuance of the said permits seek to ensure that regulations of the DENR with respect to air
quality standards and the prevention of air pollution are achieved and complied with by such
enterprises.
The Renewable Energy Act
The Renewable Energy Act of 2008 (Republic Act No. 9513) (RE Act) aims to promote
development and commercialization of renewable and environment-friendly energy resources
such as biomass, solar, and wind through various tax incentives. Some of the tax incentives
granted to renewable energy developers under the said law include (i) a seven-year income tax
holiday; (ii) duty free importation of renewable energy machinery, equipment, and materials; (iii)
special realty tax rates on equipment and machinery; (iv) zero percent VAT rate for power
generated from these energy sources; and (v) the imposition of a reduced corporate tax of 10%
on its net taxable income after the income tax holiday.
The RE Act establishes the framework for the accelerated development and advancement of
renewable energy resources as well as the development of a strategic program to increase its
utilization. The RE Act defines renewable energy resources as energy resources that do not
have an upper limit on the total quantity to be used. Such resources are renewable on a regular
basis, and their renewal rate is relatively rapid to consider availability over an indefinite period of
time. These include, among others, biomass, solar, wind, geothermal, ocean energy, and
hydropower conforming to internationally accepted norms and standards on dams, and other
renewable energy technologies.
The DOE is the lead agency mandated to implement the provisions of the law.
Other Environmental Laws
Other regulatory environmental laws and regulations applicable to the businesses of SMC Global
Power include the following:
The Toxic Substances and Hazardous and Nuclear Waste Control Act of 1990 (Republic
Act No. 6969), which regulates, restricts or prohibits the (i) importation, manufacture,
processing, handling, storage, transportation, sale, distribution, use and disposal of
chemical substance and mixtures that present unreasonable risk or injury to health or the
environment, and (ii) entry into the Philippines or the keeping in storage of hazardous
wastes which include byproducts, process residue, contaminated plant or equipment or
other substances from manufacturing operations. The said law is implemented by the
DENR.
The Ecological Solid Waste Management Act of 2000 (Republic Act No. 9003), which
provides for the proper management of solid waste which includes discarded commercial
waste and non-hazardous institutional and industrial waste. The said law prohibits,
among others, the transporting and dumping of collected solid wastes in areas other than
prescribed centers and facilities. The National Solid Waste Management Commission,
together with other Government agencies and the different local Government units, are
157

responsible for the implementation and enforcement of the said law.


The Code on Sanitation of the Philippines (the Sanitation Code) (Presidential Decree
No. 856), which provides for sanitary and structural requirements in connection with the
operation of certain establishments such as food establishments which include such
places where food or drinks are manufactured, processed, stored, sold or served. Under
the Sanitation Code, which is implemented by the Philippine Department of Health, food
establishments are required to secure sanitary permits prior to operation which shall be
renewable on a yearly basis.
Foreign Investment Act of 1991 (FIA)
The FIA liberalized the entry of foreign investment into the Philippines. Under the FIA, in
domestic market enterprises, foreigners can own as much as 100% equity except in areas
specified in the Tenth Regular Foreign Investment Negative List (the Negative List). This
Negative List enumerates industries and activities which have foreign ownership limitations
under the FIA and other existing laws. Nationalized activities include, among others, land
ownership, telecommunications, mining and the operation of public utilities.
In connection with the ownership of private land, the Philippine Constitution states that no private
land shall be transferred or conveyed except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least 60% of whose capital is owned
by such citizens. Likewise, under the Philippine Constitution, only citizens of the Philippines or
corporations or associations organized under the laws of the Philippines at least 60% of whose
capital is owned by such citizens may engage in activities relating to the exploration,
development and utilization of natural resources, which covers the utilization of natural resources
for the operation of renewable energy power plants.
For the purpose of complying with nationality laws, the term Philippine National is defined under
the FIA as any of the following:

a citizen of the Philippines;


a domestic partnership or association wholly-owned by citizens of the Philippines;
a corporation organized under the laws of the Philippines of which at least 60% of the capital
stock outstanding and entitled to vote is owned and held by citizens of the Philippines; a
corporation organized abroad and registered to do business in the Philippines under the
Corporation Code, of which 100% of the capital stock outstanding and entitled to vote is
wholly-owned by Filipinos; or
a trustee of funds for pension or other employee retirement or separation benefits, where
the trustee is a Philippine National and at least 60% of the fund will accrue to the benefit of
Philippine Nationals.

In SEC Memorandum Circular No. 08 dated May 20, 2013, or the Guidelines on Compliance with
the Filipino-Foreign Ownership Requirements Prescribed in the Constitution and/or Existing
Laws by Corporations Engaged in Nationalized and Partly Nationalized Activities. it is provided
that for purposes of determining compliance with the nationality requirement, the required
percentage of Filipino ownership shall be applied both to (a) the total number of outstanding
shares of stock entitled to vote in the election of directors, and (b) the total number of
outstanding shares of stock, whether or not entitled to vote in the election of directors.
More recently, in the case of Narra Nickel Mining and Development Corporation, et.al vs.
Redmont Consolidated Mines Corp (G.R. No. 195580) and its corresponding motions for
reconsideration (the "Narra Nickel Case"), the Supreme Court affirmed that the Grandfather
Rule, wherein shares owned by corporate shareholders are attributed either as Filipino or foreign
equity by determining the nationality not only of such corporate shareholders, but also such
corporate shareholders own shareholders, until the nationality of shareholder individuals is
taken into consideration, is to be used jointly and cumulatively with the Control Test, which
merely takes into account the nationality of the listed shareholders of the corporation. Such joint
158

and cumulative application shall be observed as follows: (1) if the corporations Filipino equity
falls below sixty percent (60%), such corporation is deemed foreign-owned, applying the Control
Test; (2) if the corporation passes the Control Test, the corporation will be considered a Filipino
corporation only if there is no doubt as to the beneficial ownership and control of the corporation;
and (3) if the corporation passes the Control Test but there is doubt as to the beneficial
ownership and control of the corporation, the Grandfather Rule must be applied.

159

PHILIPPINE TAXATION
The following is a discussion of the material Philippine tax consequences of the acquisition,
ownership and disposition of the Bonds. This general description does not purport to be a
comprehensive description of the Philippine tax aspects of the Bonds and no information is
provided regarding the tax aspects of acquiring, owning, holding or disposing of the Bonds under
applicable tax laws of other applicable jurisdictions and the specific Philippine tax consequence
in light of particular situations of acquiring, owning, holding and disposing of the Bonds in such
other jurisdictions. This discussion is based upon laws, regulations, rulings, and income tax
conventions (treaties) in effect at the date of this Prospectus.
The tax treatment of a holder of Bonds may vary depending upon such holders particular
situation, and certain holders may be subject to special rules not discussed below. This
summary does not purport to address all tax aspects that may be important to a Bondholder.
PROSPECTIVE PURCHASERS OF THE BONDS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE OWNERSHIP
AND DISPOSITION OF A BOND, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
LOCAL OR FOREIGN TAX LAWS.
As used in this section, the term resident alien refers to an individual whose residence is within
the Philippines and who is not a citizen thereof; a non-resident alien is an individual whose
residence is not within the Philippines and who is not a citizen of the Philippines. A non-resident
alien who is actually within the Philippines for an aggregate period of more than 180 days during
any calendar year is considered a non-resident alien doing business in the Philippines,
otherwise, such non-resident alien who is actually within the Philippines for an aggregate period
of 180 days or less during any calendar year is considered a non-resident alien not doing
business in the Philippines. A domestic corporation is a corporation created or organized in
the Philippines or under its laws. A resident foreign corporation is a non-Philippine corporation
engaged in trade or business within the Philippines; and a nonresident foreign corporation is a
non-Philippine corporation not engaged in trade or business within the Philippines.
Taxation of Interest
The National Internal Revenue Code of 1997, as amended, provides that interest-bearing
obligations of Philippine residents are Philippine-sourced income subject to Philippine income
tax. Interest income derived by Philippine residents and resident aliens from the Bonds is thus
subject to income tax, which is withheld at source, at the rate of 20%. Generally, interest on the
Bonds received by non-resident foreign individuals engaged in trade or business in the
Philippines is subject to a 20% withholding tax while that received by non-resident foreign
individuals not engaged in trade or business is taxed at the rate of 25%. Interest income
received by domestic corporations and resident foreign corporations is subject to a 20% final
withholding tax. Interest income received by non-resident foreign corporations is subject to a
30% final withholding tax. The tax withheld constitutes a final settlement of Philippine income
tax liability with respect to such interest.
The foregoing rates are subject to further reduction by any applicable tax treaties in force
between the Philippines and the country of residence of the non-resident owner. Most tax
treaties to which the Philippines is a party generally provide for a reduced tax rate of 10% or
15% in cases where the interest arises in the Philippines and is paid to a resident of the other
contracting state. However, most tax treaties also provide that reduced withholding tax rates
shall not apply if the recipient of the interest, who is a resident of the other contracting state,
carries on business in the Philippines through a permanent establishment and the holding of the
relevant interest-bearing instrument is effectively connected with such permanent establishment.

160

Tax-Exempt Status
Bondholders who are exempt from or are not subject to final withholding tax on interest income
may claim such exemption by submitting the necessary documents. Said Bondholder shall
submit the following requirements to the Registrar, or to the underwriters or selling agents
(together with their completed Application to Purchase) who shall then forward the same to the
Registrar: (i) certified true copy of the tax exemption certificate or ruling issued by the Bureau of
Internal Revenue; (ii) a duly notarized undertaking, in prescribed form, executed by (a) the
Corporate Secretary or any authorized representative, who has personal knowledge of the
exemption based on his official functions, if the applicant purchases the Bonds for its account, or
(b) the Trust Officer, if the applicant is a universal bank authorized under Philippine law to
perform trust and fiduciary functions and purchase the Bonds pursuant to its management of taxexempt entities (i.e. Employee Retirement Fund, etc.), declaring and warranting its tax-exempt
status, undertaking to immediately notify the Issuer of any suspension or revocation of the tax
exemption certificate and agreeing to indemnify and hold the Issuer free and harmless against
any claims, actions, suits, and liabilities resulting from the non-withholding of the required tax;
and (iii) such other documentary requirements as may be required under the applicable
regulations of the relevant taxing or other authorities; provided further that, all sums payable by
the Issuer to tax-exempt entities shall be paid in full without deductions for Taxes, duties,
assessments, or government charges, subject to the submission by the Bondholder claiming the
benefit of any exemption or reasonable evidence of such exemption to the Registrar.
Bondholders may sell their Bonds at any time, regardless of tax status of the transferor vis--vis
the transferee. Should a transfer between Bondholders of different tax status occur on a day
which is not an Interest Payment Date, tax-exempt entities trading with taxable entities shall be
treated as taxable entities for the interest period within which such transfer occurred. Transfers
taking place in the Register of Bondholders after the Bonds are listed on the PDEx shall be
allowed between taxable and tax-exempt entities without restriction and observing the tax
exemption of tax-exempt entities, if and/or when so allowed under and in accordance with the
relevant rules, conventions and guidelines of the PDEx and PDTC.
A Bondholder claiming tax-exempt status is required to submit a written notification of the sale
or purchase to the Trustee and the Registrar, including the tax status of the transferor or
transferee, as appropriate, together with the supporting documents, specified under the Section
entitled Payment of Additional Amounts; Taxation, within three days of such transfer.
Value-Added Tax
Gross receipts arising from the sale of the Bonds in the Philippines by Philippine-registered
dealers in securities and lending investors shall be subject to a 12% value-added tax. The term
gross receipt means gross selling price less cost of the securities sold.
Gross Receipts Tax
Bank and non-bank financial intermediaries are subject to gross receipts tax on gross receipts
derived from sources within the Philippines in accordance with the following schedule:
On interest, commissions and discounts from lending activities as well as income from financial
leasing, on the basis of remaining maturities of instruments from which such receipts are
derived:
Maturity period is five years or less
Maturity period is more than five years

5%
1%

In case the maturity period referred above is shortened through pre-termination, then the
maturity period shall be reckoned to end as of the date of pre-termination for purposes of
classifying the transaction and the correct rate shall be applied accordingly.
161

Net trading gains realized within the taxable year on the sale or disposition of the Bonds shall be
taxed at 7%.
Documentary Stamp Tax
A documentary stamp tax is imposed upon the issuance of debentures and certificates of
indebtedness issued by Philippine companies, such as the Bonds, at the rate of 1 for each
200, or fractional part thereof, of the issue price of such debt instruments; provided that, for
debt instruments with terms of less than one year, the documentary stamp tax to be collected
shall be of a proportional amount in accordance with the ratio of its term in number of days to
365 days.
The documentary stamp tax is collectible wherever the document is made, signed, issued,
accepted, or transferred, when the obligation or right arises from Philippine sources, or the
property is situated in the Philippines. Any applicable documentary stamp taxes on the original
issue shall be paid by the Issuer for its own account.
No documentary stamp tax is imposed on the subsequent sale or disposition of the Bonds.
Taxation on Sale or Other Disposition of the Bonds
Income Tax
The Bondholder will recognize gain or loss upon the sale or other disposition (including a
redemption at maturity) of the Bonds in an amount equal to the difference between the amount
realized from such disposition and such basis of the Bondholders in the Bonds. Such gain or
loss is likely to be deemed a capital gain or loss assuming that the Bondholder has held the
Bonds as capital assets.
Under the Tax Code, any gain realized from the sale, exchange or retirement of securities,
debentures and other certificates of indebtedness with an original maturity date of more than five
years (as measured from the date of issuance of such securities, debentures or other certificates
of indebtedness) shall not be subject to income tax.
In case of an individual taxpayer, only 50% of the capital gain or loss is recognized upon the sale
or exchange of a capital asset if it has been held for more than 12 months.
Any gains realized by non-residents on the sale of the Bonds may be exempt from Philippine
income tax under an applicable tax treaty, subject to the filing of a tax treaty relief application
with the Philippine Bureau of Internal Revenue, or if they are sold outside the Philippines.
Estate and Donors Tax
The transfer of the Bonds by succession, whether the deceased is a Philippine resident or nonPhilippine resident, shall be subject to an estate tax which is levied on the net estate of the
deceased at progressive rates ranging from 5% to 20%, if the net estate is over 200,000. A
Bondholder shall be subject to donors tax on the transfer of the Bonds by gift at either (i) 30%,
where the donee or beneficiary is a stranger, or (ii) at progressive rates ranging from 2% to 15%
if the net gifts made during the calendar year exceed 100,000 and where the donee or
beneficiary is other than a stranger. For this purpose, a stranger is a person who is not, in
reference to the donor, a: (a) brother, sister (whether by whole or half-blood), spouse, ancestor
and lineal descendant; or (b) relative by consanguinity in the collateral line within the fourth
degree of relationship.
The estate tax and the donors tax, in respect of the Bonds, shall not be collected (a) if the
deceased, at the time of death, or the donor, at the time of the donation, was a citizen and
resident of a foreign country which, at the time of his death or donation, did not impose a transfer
tax of any character in respect of intangible personal property of citizens of the Philippines not
residing in that foreign country; or (b) if the laws of the foreign country of which the deceased or
162

donor was a citizen and resident, at the time of his death or donation, allows a similar exemption
from transfer or death taxes of every character or description in respect of intangible personal
property owned by citizens of the Philippines not residing in the foreign country.

163

FINANCIAL INFORMATION
The following pages set forth the audited financial statements of SMC Global Power as at
December 31, 2015, 2014 and 2013.

164

SMC GLOBAL POWER HOLDINGS CORP.


(A Wholly-owned Subsidiary of San Miguel Corporation)

AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014 and 2013

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders


SMC Global Power Holdings Corp.
We have audited the accompanying consolidated financial statements of SMC Global Power
Holdings Corp. (a wholly-owned subsidiary of San Miguel Corporation) and Subsidiaries, which
comprise the consolidated statements of financial position as at December 31, 2015 and 2014,
and the consolidated statements of income, consolidated statements of comprehensive income,
consolidated statements of changes in equity and consolidated statements of cash flows for each
of the three years in the period ended December 31, 2015, and notes, comprising a summary of
significant accounting policies and other explanatory information.
Managements Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with Philippine Financial Reporting Standards, and for such
internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on
our audits. We conducted our audits in accordance with Philippine Standards on Auditing.
Those standards require that we comply with ethical requirements and plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
auditors judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditors consider internal control relevant to the entitys preparation and fair
presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entitys internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made
by management, as well as evaluating the overall presentation of the consolidated financial
statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.

F-2

F-3

SMC GLOBAL POWER HOLDINGS CORP.


(A Wholly-owned Subsidiary of San Miguel Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2015 AND 2014
(In Thousands)

Note

2015

2014

8, 26, 27
4, 9, 18, 26, 27
4, 10

P22,241,361
18,473,625
1,263,218

P38,304,294
18,208,339
1,365,033

7, 11

15,068,747
57,046,951

9,137,202
67,014,868

4, 12
4, 13

255,452,996
10,612,937

228,133,323
10,612,277

4, 6
4, 6, 14
4, 23
15, 18, 26, 27

689,548
2,413,249
2,745,943
2,248,226
274,162,899

671,783
2,322,241
2,779,380
2,215,415
246,734,419

P331,209,850

P313,749,287

13, 16, 18, 26, 27, 29

P32,841,050

P28,101,112

4, 7, 26, 27

16,546,763

16,205,224

17, 26, 27

15,647,244
99,275
65,134,332

1,330,037
151,360
45,787,733

17, 26, 27

42,960,617

47,383,208

4, 7, 26, 27
23
16, 19, 29

162,646,430
3,882,930
150,283
209,640,260

170,098,521
3,043,470
687,178
221,212,377

274,774,592

267,000,110

ASSETS
Current Assets
Cash and cash equivalents
Trade and other receivables - net
Inventories
Prepaid expenses and other
current assets
Total Current Assets
Noncurrent Assets
Property, plant and equipment - net
Investments and advances - net
Deferred exploration and
development costs
Intangible assets and goodwill
Deferred tax assets
Other noncurrent assets - net
Total Noncurrent Assets

LIABILITIES AND EQUITY


Current Liabilities
Accounts payable and accrued
expenses
Finance lease liabilities - current
portion
Current maturities of long-term
debt - net of debt issue costs
Income tax payable
Total Current Liabilities
Noncurrent Liabilities
Long-term debt - net of current
maturities and debt issue costs
Finance lease liabilities net of current portion
Deferred tax liabilities
Other noncurrent liabilities
Total Noncurrent Liabilities
Total Liabilities
Forward

F-4

Note

2015

2014

20

Equity
Capital stock
Additional paid-in capital
Undated subordinated capital securities
Reserves
Reserve for retirement plan
Retained earnings
Total Equity

P1,062,504
2,490,000
26,933,565
785,279
(15,648)
25,179,558
56,435,258
P331,209,850

See Notes to the Consolidated Financial Statements.

F-5

P1,062,504
2,490,000
13,110,066
785,279
29,301,328
46,749,177
P313,749,287

SMC GLOBAL POWER HOLDINGS CORP.


(A Wholly-owned Subsidiary of San Miguel Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
(In Thousands, Except Per Share Data)

Note
REVENUES
Sale of power
Retail and other power-related services

2015

2014

2013

P73,849,465
3,657,226

P80,080,157
4,213,433

P73,882,922
160,865

77,506,691

84,293,590

74,043,787

23,224,178
10,376,590
8,330,550
6,466,398
502,211
4,904,135

30,775,896
11,945,280
6,045,468
6,143,866
575,632
2,911,930

31,269,293
11,179,322
3,929,184
5,382,435
194,388
1,547,750

53,804,062

58,398,072

53,502,372

23,702,629

25,895,518

20,541,415

414,444

549,977

447,843

5, 7, 18, 28

COST AND EXPENSES


Cost of power sold:
Energy fees
5, 7
Coal, fuel oil and other consumables 5, 7, 10, 18
Power purchases
5, 7
Depreciation and amortization
5, 7, 12
Plant operations and maintenance fees
5, 18, 21
Operating expenses
5, 7, 18, 21

INTEREST INCOME
INTEREST EXPENSE AND
OTHER FINANCING CHARGES

7, 17

(13,130,252)

(13,168,470)

EQUITY IN NET EARNINGS


(LOSSES) OF ASSOCIATES AND
JOINT VENTURES - Net

13

(528,445)

(22,345)

GAIN ON SALE OF
INVESTMENT

13

OTHER INCOME (CHARGES) - Net

7, 22

INCOME BEFORE INCOME TAX


INCOME TAX EXPENSE
(BENEFIT) - Net

23, 24

NET INCOME
25

Basic/Diluted Earnings Per Share

See Notes to the Consolidated Financial Statements.

F-6

(5,926,050)

(12,673,891)

795,004

2,587,044

68,225

(8,491,062)

4,532,326

13,322,905

2,703,408

2,693,423

P1,828,918

P10,629,482

P4,042,655

P7.73

P3.23

(P0.07)

3,206,353
(836,302)

SMC GLOBAL POWER HOLDINGS CORP.


(A Wholly-owned Subsidiary of San Miguel Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
(In Thousands)

Note
NET INCOME

2015

2014

2013

P1,828,918

P10,629,482

P4,042,655

OTHER COMPREHENSIVE INCOME


Items that will not be reclassified to profit
or loss
Equity reserve for retirement plan
19
Income tax benefit
23
Share in other comprehensive income of an
associate, net of disposal
13, 20
TOTAL COMPREHENSIVE INCOME

(22,354)
6,706

39,306

15,648

39,306

P1,813,270

See Notes to the Consolidated Financial Statements.

F-7

P10,629,482

P4,081,961

SMC GLOBAL POWER HOLDINGS CORP.


(A Wholly-owned Subsidiary of San Miguel Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
(In Thousands)

Capital
Stock
(Note 20)
Balance as of January 1, 2015

P1,062,504

Additional
Paid-in
Capital

Undated
Subordinated
Capital
Securities
(Note 20)

Reserves
(Note 20)

P2,490,000

P13,110,066

P785,279

Net income for the year


Equity reserve for retirement plan - net of tax

Total comprehensive income for the year


Issuance of undated subordinated capital securities
Dividends declared
Distributions paid

13,823,499
-

Reserve for
Retirement Plan
(Note 19)
P -

Retained
Earnings
(Note 20)
P29,301,328

Total Equity
P46,749,177

(15,648)

1,828,918
-

1,828,918
(15,648)

(15,648)
-

1,828,918
(4,500,000)
(1,450,688)

1,813,270
13,823,499
(4,500,000)
(1,450,688)

Balance as of December 31, 2015

P1,062,504

P2,490,000

P26,933,565

P785,279

Balance as of January 1, 2014


Issuance of undated subordinated capital securities
Net income/total comprehensive income for the year
Dividends declared
Distributions paid

P1,062,504
-

P2,490,000
-

P 13,110,066
-

P785,279
-

Balance as of December 31, 2014

P1,062,504

P2,490,000

P13,110,066

Balance as of January 1, 2013

P1,062,504

P2,490,000

(P15,648)

P25,179,558

P56,435,258

P -

P29,395,060
10,629,482
(10,000,000)
(723,214)

P33,732,843
13,110,066
10,629,482
(10,000,000)
(723,214)

P785,279

P -

P29,301,328

P46,749,177

P745,973

P -

P29,852,405

P34,150,882

Net income for the year


Share in other comprehensive income of an associate - net of tax

39,306

4,042,655
-

4,042,655
39,306

Total comprehensive income for the year


Dividends declared

39,306
-

4,042,655
(4,500,000)

4,081,961
(4,500,000)

P785,279

P -

Balance as of December 31, 2013

P1,062,504

P2,490,000

See Notes to the Consolidated Financial Statements.

F-8

P29,395,060

P33,732,843

SMC GLOBAL POWER HOLDINGS CORP.


(A Wholly-owned Subsidiary of San Miguel Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
(In Thousands)

Note
CASH FLOWS FROM OPERATING
ACTIVITIES
Income before income tax
Adjustments for:
Interest expense and other financing
charges
7, 17
Unrealized foreign exchange losses - net
26
Depreciation and amortization
7, 12
Equity in net losses (earnings) of
associates and joint ventures - net
13
Impairment losses on trade and other
receivables
9
Retirement benefit expense
19
Interest income
8, 9, 15
Gain on sale of investment
13
Operating income before working capital
changes
Decrease (increase) in:
Trade and other receivables - net
9
Inventories
10
Prepaid expenses and other current assets
11
Other noncurrent assets
15
Increase (decrease) in:
Accounts payable and accrued expenses 16, 29
Other noncurrent liabilities
Cash generated from operations
Interest income received
Finance cost paid
17
Income taxes paid

Net cash flows used in investing activities


Forward

F-9

2014

2013

P4,532,326

P13,322,905

P3,206,353

13,130,252
7,505,369
6,539,813

13,168,470
1,584,500
6,187,640

12,673,891
9,592,617
5,404,184

528,445

22,345

374,801
6,611
(414,444)
-

144,393
8,978
(549,977)
-

(795,004)
32,850
7,714
(447,843)
(2,587,044)

32,203,173

33,889,254

27,087,718

(749,571)
101,815
(6,647,768)
221,001

(3,037,652)
134,102
(1,902,310)
1,290,895

(1,633,834)
(314,185)
(240,126)
(1,789,482)

4,686,593
(565,860)
29,249,383
426,480
(2,907,116)
(1,517,632)

5,136,893
670,486
36,181,668
546,350
(2,196,778)
(1,675,452)

3,120,373
26,230,464
527,661
(800,071)
(294,055)

25,251,115

32,855,788

25,663,999

12
13
15
14

(33,832,759)
(529,105)
(253,812)
(117,735)

(17,299,444)
(4,622,823)
(593,649)

(19,122,531)
(2,145,936)
-

6
9
13

(17,765)
-

(145,784)
16,228,991
-

(200,780)
704,407

(34,751,176)

(6,432,709)

(20,764,840)

Net cash flows provided by operating


activities
CASH FLOWS FROM INVESTING
ACTIVITIES
Net additions to property, plant and
equipment
Additions to investments and advances
Noncurrent receivable
Additions to intangible assets
Additions to deferred exploration and
development costs
Proceeds from sale of investment
Dividends received

2015

Note
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from issuance of undated
subordinated capital securities
Proceeds from long-term debt
Payments of finance lease liabilities
Cash dividends paid
Distributions to undated subordinated
capital securities holders
Payment of long-term debt

2015

2014

2013

20
17
7
20

P13,823,499
8,825,000
(22,280,118)
(4,500,000)

P13,110,066
1,500,000
(20,123,987)
(10,000,000)

P 33,191,756
(19,146,035)
(4,500,000)

20
17

(1,450,688)
(1,373,100)

(723,214)
(193,200)

(8,708,000)

(6,955,407)

(16,430,335)

Net cash flows provided by (used in)


financing activities
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND CASH
EQUIVALENTS

392,535

NET INCREASE (DECREASE) IN


CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS
AT END OF YEAR

See Notes to the Consolidated Financial Statements.

F-10

(813,621)

837,721

(167,154)

(16,062,933)

9,179,123

5,569,726

38,304,294

29,125,171

23,555,445

P22,241,361

P38,304,294

P29,125,171

SMC GLOBAL POWER HOLDINGS CORP.


(A Wholly-owned Subsidiary of San Miguel Corporation)
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Per Share Data and Number of Shares)

1. Reporting Entity
SMC Global Power Holdings Corp. (the Parent Company) was incorporated in the
Philippines and registered with the Philippine Securities and Exchange Commission
(SEC) on January 23, 2008, and its primary purpose of business is to purchase, sell,
lease, develop and dispose of all properties of every kind and description, and shares of
stocks or other securities or obligations, created or issued by any corporation or other
entity. The Parent Companys registered office address is located at 155 EDSA,
Brgy. Wack-Wack, Mandaluyong City, Metro Manila.
The accompanying consolidated financial statements comprise the financial statements of
the Parent Company and its Subsidiaries (collectively referred to as the Group) and the
Groups interests in associates and joint ventures.
The Parent Company is a wholly-owned subsidiary of San Miguel Corporation (SMC).
The ultimate parent company of the Group is Top Frontier Investment Holdings, Inc.
(Top Frontier). SMC and Top Frontier are public companies under Section 17.2 of the
Securities Regulation Code and whose shares are listed on The Philippine Stock
Exchange, Inc. (PSE).

2. Basis of Preparation
Statement of Compliance
The accompanying consolidated financial statements have been prepared in compliance
with Philippine Financial Reporting Standards (PFRS). PFRS are based on International
Financial Reporting Standards (IFRS) issued by the International Accounting Standards
Board. PFRS consist of PFRS, Philippine Accounting Standards (PAS) and Philippine
Interpretations issued by the Financial Reporting Standards Council (FRSC).
The Parent Company plans to offer and sell its bonds to the public in the Philippines and
to list the same in the Philippine Dealing & Exchange Corp. The Parent Company
presented its consolidated financial statements as of December 31, 2015 and 2014 and for
the years ended December 31, 2015, 2014 and 2013 to comply with the three-year
comparative format under Rule 68 of the Securities Regulation Code, as amended.
The consolidated financial statements are also prepared to comply with the requirements
under Section 4.12, Provision of Financial Statements and Reports, of the US$300,000
7% Notes due 2016 issued by the Parent Company (Note 17).
The consolidated financial statements were authorized for issue by the Board of Directors
(BOD) on March 17, 2016.

F-11

Basis of Measurement
The consolidated financial statements of the Group have been prepared on a historical
cost basis of accounting, except for the defined benefit liability which is measured at
present value of the defined benefit obligation.
Functional and Presentation Currency
The consolidated financial statements are presented in Philippine peso, which is the
Parent Companys functional currency. All financial information are rounded off to the
nearest thousand (P000), except when otherwise indicated.
Basis of Consolidation
The Parent Companys subsidiaries, primarily engaged in power generation, retail and
other power-related services and coal mining are incorporated in the Philippines and
registered with the Philippine SEC. The subsidiaries are as follows:
Note
Power Generation
San Miguel Energy Corporation (SMEC)
South Premiere Power Corp. (SPPC)
Strategic Power Devt. Corp. (SPDC)
SMC PowerGen Inc. (SPI)
Limay Power Generation Corporation (c)
SMC Consolidated Power Corporation (SCPC) (b)
San Miguel Consolidated Power Corporation (SMCPC) (b)
PowerOne Ventures Energy Inc. (PVEI)
Central Luzon Premiere Power Corp. (CLPPC) (e)
Limay Premiere Power Corp. (LPPC) (b) (e)
Mariveles Power Generation Corporation (MPGC) (e)
Retail and Other Power-related Services
San Miguel Electric Corp. (SMELC)
SMC Power Generation Corp. (SPGC)
Albay Power and Energy Corp. (APEC)
Coal Mining
Daguma Agro-Minerals, Inc. (DAMI) (a)
Sultan Energy Phils. Corp. (SEPC) (a)
Bonanza Energy Resources, Inc. (BERI) (a)
Others
Mantech Power Dynamics Services Inc. (MPDSI) (e)
Safetech Power Services Corp. (SPSC) (e)
Ondarre Holding Corporation (OHC) (d)
Golden Quest Equity Holdings Inc. (GQEHI) (a) (e)
Grand Planters International, Inc. (GPII) (f)
(a)
(b)
(c)
(d)
(e)
(f)

Percentage of Ownership
2014
2015

7, 18

13

100
100
100
100
100
100
100
100
100
100
100

100
100
100
100
100
100
100
100
-

100
100
100

100
100
100

100
100
100

100
100
100

100
100
100
100
100

7, 18
13
6

13
13

Indirectly owned by the Parent Company through SMEC and has not yet started commercial operations as of
December 31, 2015.
Construction of power plants on-going as of December 31, 2015.
Indirectly owned by the Parent Company through SPI and has not yet started commercial operations as of
December 31, 2015.
Acquired in February 2015 and has not yet started commercial operations as of December 31, 2015.
Incorporated in 2015 and has not yet started commercial operations as of December 31, 2015.
Acquired in September 2015.

F-12

A subsidiary is an entity controlled by the Group. The Group controls an entity if and
only if, the Group is exposed to, or has rights to, variable returns from its involvement
with the entity and has the ability to affect those returns through its power over the entity.
The Group reassesses whether or not it controls an investee if facts and circumstances
indicate that there are changes to one or more of the three elements of control.
When the Group has less than majority of the voting or similar rights of an investee, the
Group considers all relevant facts and circumstances in assessing whether it has power
over an investee, including the contractual arrangement with the other vote holders of the
investee, rights arising from other contractual arrangements and the Groups voting rights
and potential voting rights.
The financial statements of the subsidiaries are included in the consolidated financial
statements from the date when the Group obtains control, and continue to be consolidated
until the date when such control ceases.
The financial statements of the subsidiaries are prepared for the same reporting period as
the Parent Company, using uniform accounting policies for like transactions and other
events in similar circumstances. Intergroup balances and transactions, including
intergroup unrealized profits and losses, are eliminated in preparing the consolidated
financial statements.

3. Significant Accounting Policies


The accounting policies set out below have been applied consistently to all periods
presented in the consolidated financial statements, except for the changes in accounting
policies as explained below.
Adoption of New and Amended Standards and Interpretation
The FRSC approved the adoption of a number of new and amended standards and
interpretation as part of PFRS.
Amendments to Standards and Interpretation Adopted in 2015
The Group has adopted the following PFRS effective January 1, 2015 and accordingly,
changed its accounting policies in the following areas:

Annual Improvements to PFRS Cycles 2010-2012 and 2011-2013 contain


11 changes to nine standards with consequential amendments to other standards and
interpretations, of which only the following are applicable to the Group:

Meaning of Vesting Condition (Amendment to PFRS 2, Share-based Payment).


PFRS 2 has been amended to clarify the definition of vesting condition by
separately defining performance condition and service condition.
The amendment also clarifies the following: (i) how to distinguish between a
market and a non-market performance condition; and (ii) the basis on which a
performance condition can be differentiated from a non-vesting condition. The
adoption of the amendment did not have an effect on the consolidated financial
statements.

F-13

Scope Exclusion for the Formation of Joint Arrangements (Amendment to


PFRS 3, Business Combinations). PFRS 3 has been amended to clarify that the
standard does not apply to the accounting for the formation of all types of joint
arrangements in PFRS 11, Joint Arrangements - i.e. including joint operations in the financial statements of the joint arrangements themselves. The adoption of
the amendment did not have an effect on the consolidated financial statements.

Disclosures on the Aggregation of Operating Segments (Amendment to PFRS 8,


Operating Segments). PFRS 8 has been amended to explicitly require the
disclosure of judgments made by management in applying the aggregation
criteria. The disclosures include: (i) a brief description of the operating segments
that have been aggregated; and (ii) the economic indicators that have been
assessed in determining that the operating segments share similar economic
characteristics. In addition, the amendments clarify that a reconciliation of the
total of the reportable segments assets to the entitys assets is required only if
this information is regularly provided to the entitys chief operating decision
maker. This change aligns the disclosure requirements with those for segment
liabilities. The adoption of the amendments did not have an effect on the
consolidated financial statements.

Scope of Portfolio Exception (Amendment to PFRS 13, Fair Value


Measurement). The amendment clarifies that the scope of the exception for
measuring the fair value of a group of financial assets and financial liabilities
with offsetting risk positions on a net basis (portfolio exception) applies to
contracts within the scope of PAS 39, Financial Instruments: Recognition and
Measurement and PFRS 9, Financial Instruments, regardless of whether they
meet the definition of financial assets or financial liabilities under PAS 32,
Financial Instruments: Presentation - e.g., certain contracts to buy or sell nonfinancial items that can be settled net in cash or another financial instrument.
The adoption of the amendment did not have an effect on the consolidated
financial statements.

Definition of Related Party (Amendments to PAS 24, Related Party


Disclosures). The definition of a related party is extended to include a
management entity that provides key management personnel (KMP) services to
the reporting entity, either directly or through a group entity. For related party
transactions that arise when KMP services are provided to a reporting entity, the
reporting entity is required to separately disclose the amounts that it has
recognized as an expense for those services that are provided by a management
entity; however, it is not required to look through the management entity and
disclose compensation paid by the management entity to the individuals
providing KMP services. The reporting entity will also need to disclose other
transactions with the management entity under the existing disclosure
requirements of PAS 24 - e.g., loans. The adoption of the amendments did not
have an effect on the consolidated financial statements.

Inter-relationship of PFRS 3 and PAS 40, Investment Property (Amendment to


PAS 40). PAS 40 has been amended to clarify that an entity should assess
whether an acquired property is an investment property under PAS 40 and
perform a separate assessment under PFRS 3 to determine whether the
acquisition of the investment property constitutes a business combination.
Entities will still need to use judgment to determine whether the acquisition of an
investment property is an acquisition of a business under PFRS 3. The adoption
of the amendment did not have an effect on the consolidated financial statements.

F-14

Additional disclosures required by the amended standards were included in the


consolidated financial statements, where applicable.
New and Amended Standards and Interpretation Not Yet Adopted
A number of new and amended standards and interpretation are effective for annual
periods beginning after January 1, 2015 and have not been applied in preparing these
consolidated financial statements. Unless otherwise indicated, none of these is expected
to have a significant effect on the consolidated financial statements.
The Group will adopt the following new and amended standards and interpretation on the
respective effective dates:

Disclosure Initiative (Amendments to PAS 1, Presentation of Financial Statements).


The amendments clarify the following: (i) the materiality requirements in PAS 1;
(ii) that specific line items in the consolidated statements of income, consolidated
statements of comprehensive income and the consolidated statements of financial
position may be disaggregated; (iii) that entities have flexibility as to the order in
which they present the notes to the consolidated financial statements; and (iv) that
share of other comprehensive income of associates and joint ventures accounted for
using the equity method must be presented in aggregate as a single line item, and
classified between those items that will or will not be subsequently reclassified to
profit or loss. Furthermore, the amendments clarify the requirements that apply
when additional subtotals are presented in the consolidated statements of financial
position, the consolidated statements of income and consolidated statements of
comprehensive income. The amendments are required to be applied for annual
periods beginning on or after January 1, 2016. Early adoption is permitted.

Clarification of Acceptable Methods of Depreciation and Amortization (Amendments


to PAS 16, Property, Plant and Equipment and PAS 38, Intangible Assets). The
amendments to PAS 38 introduce a rebuttable presumption that the use of
revenue-based amortization methods for intangible assets is inappropriate. This
presumption can be overcome only when revenue and the consumption of the
economic benefits of the intangible asset are highly correlated, or when the intangible
asset is expressed as a measure of revenue. The amendments to PAS 16 explicitly
state that revenue-based methods of depreciation cannot be used for property, plant
and equipment. This is because such methods reflect factors other than the
consumption of economic benefits embodied in the asset - e.g., changes in sales
volumes and prices. The amendments are required to be applied prospectively for
annual periods beginning on or after January 1, 2016. Early application is permitted.

PFRS 9 (2014) replaces PAS 39 and supersedes the previously published versions of
PFRS 9 that introduced new classifications and measurement requirements (in 2009
and 2010) and a new hedge accounting model (in 2013). PFRS 9 includes revised
guidance on the classification and measurement of financial assets, including a new
expected credit loss model for calculating impairment of all financial assets that are
not measured at fair value through profit or loss (FVPL), which generally depends on
whether there has been a significant increase in credit risk since initial recognition of
a financial asset, and supplements the new general hedge accounting requirements
published in 2013. The new model on hedge accounting requirements provides
significant improvements by aligning hedge accounting more closely with risk
management. The new standard is required to be applied retrospectively for annual
periods beginning on or after January 1, 2018. Early adoption is permitted.

F-15

PFRS 16, Leases, supersedes PAS 17, Leases, and the related Philippine
Interpretations. The new standard introduces a single lease accounting model for
lessees under which all major leases are recognized on-balance sheet, removing the
lease classification test. Lease accounting for lessors essentially remains unchanged
except for a number of details including the application of the new lease definition,
new sale-and-leaseback guidance, new sub-lease guidance and new disclosure
requirements. Practical expedients and targeted reliefs were introduced including an
optional lessee exemption for short-term leases (leases with a term of 12 months or
less) and low-value items, as well as the permission of portfolio-level accounting
instead of applying the requirements to individual leases. New estimates and
judgmental thresholds that affect the identification, classification and measurement
of lease transactions, as well as requirements to reassess certain key estimates and
judgments at each reporting date were introduced. PFRS 16 is effective for annual
periods beginning on or after January 1, 2019. Earlier application is not permitted
until the FRSC has adopted IFRS 15, Revenue from Contracts with Customers. The
Group is currently assessing the potential impact of PFRS 16 and plans to adopt this
new standard on leases on the required effective date once adopted locally.

IFRS 15 replaces International Accounting Standards (IAS) 11, Construction


Contracts, IAS 18, Revenue, International Financial Reporting Interpretations
Committee (IFRIC) 13, Customer Loyalty Programmes, IFRIC 18, Transfer of Assets
from Customers and Standard Interpretation Committee - 31, Revenue - Barter
Transactions Involving Advertising Services. The new standard introduces a new
revenue recognition model for contracts with customers which specifies that revenue
should be recognized when (or as) a company transfers control of goods or services
to a customer at the amount to which the company expects to be entitled. Depending
on whether certain criteria are met, revenue is recognized over time, in a manner that
best reflects the companys performance, or at a point in time, when control of the
goods or services is transferred to the customer. The standard does not apply to
insurance contracts, financial instruments or lease contracts, which fall in the scope
of other IFRS. It also does not apply if two companies in the same line of business
exchange nonmonetary assets to facilitate sales to other parties. Furthermore, if a
contract with a customer is partly in the scope of another IFRS, then the guidance on
separation and measurement contained in the other IFRS takes precedence.
However, the FRSC has yet to issue/approve this new revenue standard for local
adoption pending completion of a study by the Philippine Interpretations Committee
(PIC) on its impact on the real estate industry. If approved, the standard is effective
for annual periods beginning on or after January 1, 2018, with early adoption
permitted.

Financial Assets and Financial Liabilities


Date of Recognition. The Group recognizes a financial asset or a financial liability in the
consolidated statements of financial position when it becomes a party to the contractual
provisions of the instrument. In the case of a regular way purchase or sale of financial
assets, recognition is done using settlement date accounting.
Initial Recognition of Financial Instruments. Financial instruments are recognized
initially at fair value of the consideration given (in case of an asset) or received (in case
of a liability). The initial measurement of financial instruments, except for those
designated as at FVPL, includes transaction costs.

F-16

Day 1 Difference. Where the transaction price in a non-active market is different from
the fair value of other observable current market transactions in the same instrument or
based on a valuation technique whose variables include only data from observable
market, the Group recognizes the difference between the transaction price and the fair
value (a Day 1 difference) in the consolidated statements of income unless it qualifies
for recognition as some other type of asset. In cases where data used is not observable,
the difference between the transaction price and model value is only recognized in the
consolidated statements of income when the inputs become observable or when the
instrument is derecognized. For each transaction, the Group determines the appropriate
method of recognizing the Day 1 difference amount.
Financial Assets
The Group classifies its financial assets, at initial recognition, in the following categories:
financial assets at FVPL, loans and receivables, available-for-sale (AFS) financial assets
and held-to-maturity (HTM) investments. The classification depends on the purpose for
which the investments are acquired and whether they are quoted in an active market.
The Group determines the classification of its financial assets at initial recognition and,
where allowed and appropriate, re-evaluates such designation at every reporting date.
As of December 31, 2015 and 2014, the Group has no financial assets at FVPL, AFS
financial assets and HTM investments.
Loans and Receivables. Loans and receivables are non-derivative financial assets with
fixed or determinable payments and maturities that are not quoted in an active market.
They are not entered into with the intention of immediate or short-term resale and are not
designated as AFS financial assets or financial assets at FVPL.
Subsequent to initial measurement, loans and receivables are carried at amortized cost
using the effective interest rate method, less any impairment in value. Any interest earned
on loans and receivables is recognized as part of Interest income account in the
consolidated statements of income on an accrual basis. Amortized cost is calculated by
taking into account any discount or premium on acquisition and fees that are an integral
part of the effective interest rate. The periodic amortization is also included as part of
Interest income account in the consolidated statements of income. Gains or losses are
recognized in the consolidated statements of income when loans and receivables are
derecognized or impaired.
Cash includes cash on hand and in banks which are stated at face value. Cash equivalents
are short-term, highly liquid investments that are readily convertible to known amounts
of cash and are subject to an insignificant risk of changes in value.
The Groups cash and cash equivalents, trade and other receivables, restricted cash and
noncurrent receivable are included under this category (Notes 8, 9, 15, 26 and 27).
Financial Liabilities
The Group classifies its financial liabilities, at initial recognition, in the following
categories: financial liabilities at FVPL and other financial liabilities. The Group
determines the classification of its financial liabilities at initial recognition and, where
allowed and appropriate, re-evaluates such designation at every reporting date. All
financial liabilities are recognized initially at fair value and, in the case of loans and
borrowings, net of directly attributable transaction costs.
As of December 31, 2015 and 2014, the Group has no financial liabilities at FVPL.

F-17

Other Financial Liabilities. This category pertains to financial liabilities that are not
designated or classified as at FVPL. After initial measurement, other financial liabilities
are carried at amortized cost using the effective interest rate method. Amortized cost is
calculated by taking into account any premium or discount and any directly attributable
transaction costs that are considered an integral part of the effective interest rate of the
liability. The effective interest rate amortization is included in Interest expense and
other financing charges account in the consolidated statements of income. Gains and
losses are recognized in the consolidated statements of income when the liabilities are
derecognized as well as through the amortization process.
The Groups liabilities arising from its trade or borrowings such as accounts payable and
accrued expenses, finance lease liabilities and long-term debt are included under this
category (Notes 7, 16, 17, 26 and 27).
Embedded Derivatives
The Group assesses whether embedded derivatives are required to be separated from the
host contracts when the Group becomes a party to the contract.
An embedded derivative is separated from the host contract and accounted for as a
derivative if all of the following conditions are met:
(a) the economic characteristics and risks of the embedded derivative are not closely
related to the economic characteristics and risks of the host contract;
(b) a separate instrument with the same terms as the embedded derivative would meet
the definition of a derivative; and
(c) the hybrid or combined instrument is not recognized as at FVPL.
Reassessment only occurs if there is a change in the terms of the contract that
significantly modifies the cash flows that would otherwise be required.
Embedded derivatives that are bifurcated from the host contracts are accounted for either
as financial assets or financial liabilities at FVPL.
The Group does not have any embedded derivatives as of December 31, 2015 and 2014.
Derecognition of Financial Assets and Financial Liabilities
Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part
of a group of similar financial assets) is primarily derecognized when:

the rights to receive cash flows from the asset have expired; or

the Group has transferred its rights to receive cash flows from the asset or has
assumed an obligation to pay them in full without material delay to a third party
under a pass-through arrangement; and either: (a) has transferred substantially all
the risks and rewards of the asset; or (b) has neither transferred nor retained
substantially all the risks and rewards of the asset, but has transferred control of the
asset.

F-18

When the Group has transferred its rights to receive cash flows from an asset or has
entered into a pass-through arrangement, it evaluates if and to what extent it has retained
the risks and rewards of ownership. When it has neither transferred nor retained
substantially all the risks and rewards of the asset nor transferred control of the asset, the
Group continues to recognize the transferred asset to the extent of the Groups continuing
involvement. In that case, the Group also recognizes the associated liability. The
transferred asset and the associated liability are measured on the basis that reflects the
rights and obligations that the Group has retained.
Financial Liabilities. A financial liability is derecognized when the obligation under the
liability is discharged or cancelled, or has expired. When an existing financial liability is
replaced by another from the same lender on substantially different terms, or the terms of
an existing liability are substantially modified, such an exchange or modification is
treated as a derecognition of the original liability and the recognition of a new liability.
The difference in the respective carrying amounts is recognized in the consolidated
statements of income.
Impairment of Financial Assets
The Group assesses, at the reporting date, whether a financial asset or group of financial
assets is impaired.
A financial asset or a group of financial assets is deemed to be impaired if, and only if,
there is objective evidence of impairment as a result of one or more events that have
occurred after the initial recognition of the asset (an incurred loss event) and that loss
event has an impact on the estimated future cash flows of the financial asset or the group
of financial assets that can be reliably estimated.
Assets Carried at Amortized Cost. For financial assets carried at amortized cost such as
loans and receivables, the Group first assesses whether impairment exists individually for
financial assets that are individually significant, or collectively for financial assets that
are not individually significant. If no objective evidence of impairment has been
identified for a particular financial asset that was individually assessed, the Group
includes the asset as part of a group of financial assets with similar credit risk
characteristics and collectively assesses the group for impairment. Assets that are
individually assessed for impairment and for which an impairment loss is, or continues to
be, recognized are not included in the collective impairment assessment.
Evidence of impairment may include indications that the borrower or a group of
borrowers is experiencing financial difficulty, default or delinquency in principal or
interest payments, or may enter into bankruptcy or other form of financial reorganization
intended to alleviate the financial condition of the borrower. For collective impairment
purposes, evidence of impairment may include observable data on existing economic
conditions or industry-wide developments indicating that there is a measurable decrease
in the estimated future cash flows of the related assets.
If there is objective evidence of impairment, the amount of loss is measured as the
difference between the assets carrying amount and the present value of estimated future
cash flows (excluding future credit losses) discounted at the financial assets original
effective interest rate (i.e., the effective interest rate computed at initial recognition).
Time value is generally not considered when the effect of discounting the cash flows is
not material. If a loan or receivable has a variable rate, the discount rate for measuring
any impairment loss is the current effective interest rate, adjusted for the original credit
risk premium. For collective impairment purposes, impairment loss is computed based
on their respective default and historical loss experience.

F-19

The carrying amount of the asset is reduced either directly or through the use of an
allowance account. The impairment loss for the period is recognized in the consolidated
statements of income. If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an event occurring after the
impairment was recognized, the previously recognized impairment loss is reversed. Any
subsequent reversal of an impairment loss is recognized in the consolidated statements of
income, to the extent that the carrying amount of the asset does not exceed its amortized
cost at the reversal date.
Classification of Financial Instruments between Liability and Equity
Financial instruments are classified as liability or equity in accordance with the substance
of the contractual arrangement. Interest, dividends, gains and losses relating to a financial
instrument or a component that is a financial liability, are reported as expense or income.
Distributions to holders of financial instruments classified as equity are charged directly
to equity, net of any related income tax benefits.
A financial instrument is classified as liability if it provides for a contractual obligation
to:

deliver cash or another financial asset to another entity;

exchange financial assets or financial liabilities with another entity under conditions
that are potentially unfavorable to the Group; or

satisfy the obligation other than by the exchange of a fixed amount of cash or another
financial asset for a fixed number of own equity shares.

If the Group does not have an unconditional right to avoid delivering cash or another
financial asset to settle its contractual obligation, the obligation meets the definition of a
financial liability.
The components of issued financial instruments that contain both liability and equity
elements are accounted for separately, with the equity component being assigned the
residual amount after deducting from the instrument as a whole, the amount separately
determined as the fair value of the liability component on the date of issue.
Debt Issue Costs
Debt issue costs are considered as an adjustment to the effective yield of the related debt
and are deferred and amortized using the effective interest rate method. When a loan is
paid, the related unamortized debt issue costs at the date of repayment are recognized in
the consolidated statements of income.
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount is reported in the
consolidated statements of financial position if, and only if, there is a currently
enforceable legal right to offset the recognized amounts and there is an intention to settle
on a net basis, or to realize the assets and settle the liabilities simultaneously. This is not
generally the case with master netting agreements, and the related assets and liabilities
are presented gross in the consolidated statements of financial position.

F-20

Inventories
Inventories are measured at the lower of cost and net realizable value. Cost is determined
using specific identification method or first-in-first-out method for materials and
supplies, specific identification method or moving average method for coal inventories
and moving average method for fuel oil and other consumables. Net realizable value is
the current replacement cost.
Business Combination
Business combination is accounted for using the acquisition method as at the acquisition
date. The cost of an acquisition is measured as the aggregate of the consideration
transferred, measured at acquisition date fair value, and the amount of any noncontrolling interests in the acquiree. For each business combination, the Group elects
whether to measure the non-controlling interests in the acquiree at fair value or at
proportionate share of the acquirees identifiable net assets. Acquisition-related costs are
expensed as incurred.
When the Group acquires a business, it assesses the financial assets and financial
liabilities assumed for appropriate classification and designation in accordance with the
contractual terms, economic circumstances and pertinent conditions as at the acquisition
date.
If the business combination is achieved in stages, the acquisition date fair value of the
acquirers previously held equity interest in the acquiree is remeasured at the acquisition
date fair value and any resulting gain or loss is recognized in the consolidated statements
of income.
The Group measures goodwill at the acquisition date as: a) the fair value of the
consideration transferred; plus b) the recognized amount of any non-controlling interests
in the acquiree; plus c) if the business combination is achieved in stages, the fair value of
the existing equity interest in the acquiree; less d) the net recognized amount (generally
fair value) of the identifiable assets acquired and liabilities assumed. When the excess is
negative, a bargain purchase gain is recognized immediately in the consolidated
statements of income. Subsequently, goodwill is measured at cost less any accumulated
impairment in value. Goodwill is reviewed for impairment, annually or more frequently,
if events or changes in circumstances indicate that the carrying amount may be impaired.
The consideration transferred does not include amounts related to the settlement of
pre-existing relationships. Such amounts are generally recognized in the consolidated
statements of income. Costs related to the acquisition, other than those associated with
the issuance of debt or equity securities that the Group incurs in connection with a
business combination, are expensed as incurred. Any contingent consideration payable is
measured at fair value at the acquisition date. If the contingent consideration is classified
as equity, it is not remeasured and settlement is accounted for within equity. Otherwise,
subsequent changes to the fair value of the contingent consideration are recognized in the
consolidated statements of income.

F-21

Goodwill in a Business Combination


Goodwill acquired in a business combination is, from the acquisition date, allocated
to each of the cash-generating units, or groups of cash-generating units that are
expected to benefit from the synergies of the combination, irrespective of whether
other assets or liabilities are assigned to those units or groups of units. Each unit or
group of units to which the goodwill is so allocated:

represents the lowest level within the Group at which the goodwill is monitored
for internal management purposes; and
is not larger than an operating segment determined in accordance with PFRS 8.

Impairment is determined by assessing the recoverable amount of the cashgenerating unit or group of cash-generating units, to which the goodwill relates.
Where the recoverable amount of the cash-generating unit or group of cashgenerating units is less than the carrying amount, an impairment loss is recognized.
Where goodwill forms part of a cash-generating unit or group of cash-generating
units and part of the operation within that unit is disposed of, the goodwill associated
with the operation disposed of is included in the carrying amount of the operation
when determining the gain or loss on disposal of the operation. Goodwill disposed
of in this circumstance is measured based on the relative values of the operation
disposed of and the portion of the cash-generating unit retained. An impairment loss
with respect to goodwill is not reversed.

Intangible Assets Acquired in a Business Combination


The cost of an intangible asset acquired in a business combination is the fair value as
at the date of acquisition, determined using discounted cash flows as a result of the
asset being owned.
Following initial recognition, intangible asset is carried at cost less any accumulated
amortization and any impairment losses. The useful life of an intangible asset is
assessed to be either finite or indefinite.
An intangible asset with finite life is amortized over the useful economic life and
assessed for impairment whenever there is an indication that the intangible asset may
be impaired. The amortization period and the amortization method for an intangible
asset with a finite useful life are reviewed at least at each reporting date. A change in
the expected useful life or the expected pattern of consumption of future economic
benefits embodied in the asset is accounted for as a change in accounting estimate.
The amortization expense on intangible asset with finite life is recognized in the
consolidated statements of income.

Loss of Control
On the loss of control, the Group derecognizes the assets and liabilities of the
subsidiary, any non-controlling interests and the other components of equity related
to the subsidiary. Any surplus or deficit arising on the loss of control is recognized in
consolidated statements of income. If the Group retains any interest in the previous
subsidiary, then such interest is measured at fair value at the date that control is lost.
Subsequently, it is accounted for as an equity-accounted investee or as an AFS
financial asset depending on the level of influence retained.

Transactions under Common Control


Transactions under common control entered into in contemplation of each other and
business combination under common control designed to achieve an overall commercial
effect are treated as a single transaction.

F-22

Transfers of assets between commonly controlled entities are accounted for using book
value accounting.
Non-controlling Interests
The acquisitions of non-controlling interests are accounted for as transactions with
owners in their capacity as owners and therefore no goodwill is recognized as a result of
such transactions. Any difference between the purchase price and the net assets of the
acquired entity is recognized in equity. The adjustments to non-controlling interests are
based on a proportionate amount of the identifiable net assets of the subsidiary.
Investments in Shares of Stock of Associates and Joint Ventures
An associate is an entity in which the Group has significant influence. Significant
influence is the power to participate in the financial and operating policies of the
investee, but is not control or joint control over those policies.
A joint venture is a type of joint arrangement whereby the parties that have joint control
of the arrangement have rights to the net assets of the joint venture. Joint control is the
contractually agreed sharing of control of an arrangement, which exists only when
decisions about the relevant activities require unanimous consent of the parties sharing
control.
The considerations made in determining significant influence or joint control is similar to
those necessary to determine control over subsidiaries.
The Groups investments in shares of stock of associates and joint ventures are accounted
for using the equity method.
Under the equity method, the investment in shares of stock of associates or joint ventures
is initially recognized at cost. The carrying amount of the investment is adjusted to
recognize the changes in the Groups share of net assets of the associate or joint venture
since the acquisition date. Goodwill relating to the associate or joint venture is included
in the carrying amount of the investment and is neither amortized nor individually tested
for impairment.
The Groups share in profit or loss of associates or joint ventures is recognized as
Equity in net earnings (losses) of associates and joint ventures - net account in the
consolidated statements of income. Adjustments to the carrying amount may also be
necessary for changes in the Groups proportionate interest in the associate or joint
venture arising from changes in the associate or joint ventures other comprehensive
income. The Groups share on these changes is recognized as Share in other
comprehensive income of an associate account in the consolidated statements of
comprehensive income. Unrealized gains and losses resulting from transactions between
the Group and the associate or joint venture are eliminated to the extent of the interest in
the associate or joint venture.
After application of the equity method, the Group determines whether it is necessary to
recognize an impairment loss with respect to the Groups net investment in the shares of
stock of associates or joint ventures. At each reporting date, the Group determines
whether there is objective evidence that the investment in shares of stock of associates or
joint ventures is impaired. If there is such evidence, the Group recalculates the amount
of impairment as the difference between the recoverable amount and carrying amount of
the investment in shares of stock of associates or joint ventures. Such impairment loss is
recognized as part of Equity in net earnings (losses) of associates and joint ventures net account in the consolidated statements of income.

F-23

Upon loss of significant influence over the associate or joint control over the joint
venture, the Group measures and recognizes any retained investment at fair value. Any
difference between the carrying amount of the investment in shares of stock of associates
or joint ventures upon loss of significant influence or joint control, and the fair value of
the retained investment and proceeds from disposal is recognized in the consolidated
statements of income.
The financial statements of the associate or joint venture are prepared for the same
reporting period as the Group. When necessary, adjustments are made to bring the
accounting policies in line with those of the Group.
Property, Plant and Equipment
Property, plant and equipment, except for land, are measured at cost less accumulated
depreciation and amortization and any accumulated impairment in value. Such cost
includes the cost of replacing part of the property, plant and equipment at the time the
cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day
servicing. Land is stated at cost less any impairment in value.
The initial cost of property, plant and equipment comprises its construction cost or
purchase price, including import duties, taxes and any directly attributable costs in
bringing the asset to its working condition and location for its intended use. Cost also
includes any related asset retirement obligation (ARO). Expenditures incurred after the
asset has been put into operation, such as repairs, maintenance and overhaul costs, are
normally recognized as expense in the period the costs are incurred. Major repairs are
capitalized as part of property, plant and equipment only when it is probable that future
economic benefits associated with the items will flow to the Group and the cost of the
items can be measured reliably.
Capital projects in progress (CPIP) represents the amount of accumulated expenditures
on unfinished and/or ongoing projects. This includes the costs of construction and other
direct costs. Borrowing costs that are directly attributable to the construction of plant and
equipment are capitalized during the construction period. CPIP is not depreciated until
such time that the relevant assets are ready for use.
Depreciation and amortization, which commence when the assets are available for their
intended use, are computed using the straight-line method over the following estimated
useful lives of the assets:

Power plants
Building
Other equipment
Leasehold improvements

Number of Years
10 - 43
15 - 25
2 - 15
5 - 10
or term of the lease
whichever is shorter

The remaining useful lives, residual values, and depreciation and amortization methods
are reviewed and adjusted periodically, if appropriate, to ensure that such periods and
methods of depreciation and amortization are consistent with the expected pattern of
economic benefits from the items of property, plant and equipment.
The carrying amounts of property, plant and equipment are reviewed for impairment
when events or changes in circumstances indicate that the carrying amounts may not be
recoverable.

F-24

Fully depreciated assets are retained in the accounts until they are no longer in use.
An item of property, plant and equipment is derecognized when either it has been
disposed of or when it is permanently withdrawn from use and no future economic
benefits are expected from its use or disposal. Any gain or loss arising from the
retirement and disposal of an item of property, plant and equipment (calculated as the
difference between the net disposal proceeds and the carrying amount of the asset) is
included in the consolidated statements of income in the period of retirement and
disposal.
Intangible Assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost
of intangible assets acquired in a business combination is its fair value at the date of
acquisition. Subsequently, intangible assets are carried at cost less accumulated
amortization and any accumulated impairment losses. Internally generated intangible
assets, excluding capitalized development costs, are not capitalized and expenditures are
recognized in the consolidated statements of income in the year in which the related
expenditures are incurred. The useful lives of intangible assets are assessed to be either
finite or indefinite.
Intangible assets with finite lives are amortized over the useful life and assessed for
impairment whenever there is an indication that the intangible assets may be impaired.
The amortization period and amortization method used for an intangible asset with a
finite useful life are reviewed at least at each reporting date. Changes in the expected
useful life or the expected pattern of consumption of future economic benefits embodied
in the asset are accounted for by changing the amortization period or method, as
appropriate, and are treated as changes in accounting estimate. The amortization expense
on intangible assets with finite lives is recognized in the consolidated statements of
income consistent with the function of the intangible asset.
Amortization is computed using the straight-line method over the following estimated
useful lives of intangible assets with finite lives:

Power concession right


Mining rights
Computer software and licenses

Number of Years
25
Life of mine or
expiration of right
3

Gains or losses arising from the disposal of an intangible asset are measured as the
difference between the net disposal proceeds and the carrying amount of the asset, and
are recognized in the consolidated statements of income when the asset is derecognized.
Power Concession Assets and Obligations
Public-to-private service concession arrangements where: (a) the grantor controls or
regulates what services the entities in the Group can provide with the infrastructure, to
whom it can provide them, and at what price; and (b) the grantor controls (through
ownership, beneficial entitlement or otherwise) any significant residual interest in the
infrastructure at the end of the term of the arrangement are accounted for under
Philippine Interpretation IFRIC 12, Service Concession Arrangements. Infrastructures
used in a public-to-private service concession arrangement for its entire useful life
(whole-of-life assets) are within the scope of the Interpretation if the conditions in (a) are
met.

F-25

The Interpretation applies to both: (a) infrastructure that the entities in the Group
construct or acquire from a third party for the purpose of the service arrangement; and
(b) existing infrastructure to which the grantor gives the entity in the Group access for the
purpose of the service arrangement.
Infrastructures within the scope of the Interpretation are not recognized as property, plant
and equipment of the Group. Under the terms of the contractual arrangements within the
scope of the Interpretation, an entity acts as a service provider. An entity constructs or
upgrades infrastructure (construction or upgrade services) used to provide a public
service and operates and maintains that infrastructure (operation services) for a specified
period of time.
The useful lives of power concession right are assessed to be either finite or indefinite.
Power concession right arising from a service concession arrangement is amortized using
straight-line method over the concession period, which is 25 years from the first day of
the commencement of operations, or the estimated useful lives of the infrastructure,
whichever is shorter, and assessed for impairment whenever there is an indication that the
asset may be impaired. The amortization period and amortization method are reviewed
annually. Changes in the expected useful life or the expected pattern of consumption of
future economic benefits embodied in the concession assets are treated as changes in
accounting estimates. The amortization expense is recognized in the consolidated
statements of income in the expense category consistent with the function of the
concession assets.
The power concession right is derecognized on disposal or when no further economic
benefits are expected from its use or disposal. Gains or losses arising from derecognition
of concession assets are recognized in consolidated statements of income and measured
as the difference between the net disposal proceeds and the carrying amount of the
concession assets.
The Groups power concession right pertains to the right granted by the Government to
the Parent Company, through APEC, to operate the Albay Electric Cooperative, Inc.
(ALECO). The Groups power concession right is carried at cost less accumulated
amortization and any accumulated impairment losses.
An entity recognizes and measures revenue in accordance with PAS 11, Construction
Contracts, and PAS 18, Revenue, for the services it performs. If an entity performs more
than one service (i.e., construction or upgrade services and operation services) under a
single contract or arrangement, consideration received or receivable is allocated by
reference to the relative fair values of the services delivered when the amounts are
separately identifiable.
When an entity provides construction or upgrade services, the consideration received or
receivable by the entity is recognized at fair value. An entity accounts for revenue and
costs relating to construction or upgrade services in accordance with PAS 11. Revenue
from construction contracts is recognized based on the percentage-of-completion method,
measured by reference to the proportion of costs incurred to date, to estimated total costs
for each contract. The applicable entity account for revenue and costs relating to
operation services in accordance with PAS 18.
An entity recognizes a financial asset to the extent that it has an unconditional contractual
right to receive cash or another financial asset from or at the direction of the grantor for
the construction services. An entity recognizes an intangible asset to the extent that it
receives a right (a license) to charge users of the public service.

F-26

When the applicable entity has contractual obligations to fulfill as a condition of its
license: (a) to maintain the infrastructure to a specified level of serviceability, or (b) to
restore the infrastructure to a specified condition before it is handed over to the grantor at
the end of the service arrangement, it recognizes and measures the contractual obligations
in accordance with PAS 37, Provisions, Contingent Liabilities and Contingent Assets,
i.e., at the best estimate of the expenditure that would be required to settle the present
obligation at the reporting date.
Concession payable is recognized at the date of inception of the concession agreement.
Fixed concession fees are recognized at present value using the discount rate at the
inception date. This account is debited upon payment of fixed fees and such payments are
apportioned between interest payment and payment of the principal. Interest arising from
the accretion of concession payable is presented under Interest expense and other
financing charges account in the consolidated statements of income.
Concession payable that are expected to be settled within 12 months after the reporting
date are classified as current liabilities. Otherwise, these are classified as noncurrent
liabilities.
In accordance with PAS 23, Borrowing Costs, borrowing costs attributable to the
arrangement are recognized as expenses in the period in which they are incurred unless
the applicable entities have a contractual right to receive an intangible asset (a right to
charge users of the public service). In this case, borrowing costs attributable to the
arrangement are capitalized during the construction phase of the arrangement.
Mining Rights
The mining rights that are acquired by the Group and have finite lives are measured at
cost less accumulated amortization and any accumulated impairment losses.
Subsequent expenditures are capitalized only when it increases the future economic
benefits embodied in the specific asset to which it relates. All other expenditures are
recognized in the consolidated statements of income as incurred.
Amortization of mining rights is recognized in the consolidated statements of income on
a straight-line basis over the estimated useful lives. The estimated useful lives of mining
rights pertain to the period from commercial operations to the end of the operating
contract. Amortization method and useful lives are reviewed at each reporting date and
adjusted as appropriate.
Gain or loss from derecognition of mining rights are measured as the difference between
the net disposal proceeds and the carrying amount of the asset, and is recognized in the
consolidated statements of income.
Deferred Exploration and Development Costs
Deferred exploration and development costs comprise expenditures which are directly
attributable to:

Researching and analyzing existing exploration data;


Conducting geological studies, exploratory drilling and sampling;
Examining and testing extraction and treatment methods; and
Compiling pre-feasibility and feasibility studies.

F-27

Deferred exploration and development costs also include expenditures incurred in


acquiring mining rights and evaluation assets, entry premiums paid to gain access to
areas of interest and amounts payable to third parties to acquire interests in existing
projects.
Exploration assets are reassessed on a regular basis and tested for impairment provided
that at least one of the following conditions is met:

the period for which the entity has the right to explore in the specific area has expired
during the period or will expire in the near future, and is not expected to be renewed;

substantive expenditure on further exploration for and evaluation of mineral


resources in the specific area is neither budgeted nor planned;

such costs are expected to be recouped in full through successful development and
exploration of the area of interest or alternatively, by its sale; or

exploration and evaluation activities in the area of interest have not yet reached a
stage which permits a reasonable assessment of the existence or otherwise of
economically recoverable reserves, and active and significant operations in relation
to the area are continuing, or planned for the future.

If the project proceeds to development stage, the amounts included within deferred
exploration and development costs are transferred to property, plant and equipment.
Impairment of Non-financial Assets
The carrying amounts of property, plant and equipment, investments and advances,
deferred exploration and development costs and intangible assets and goodwill with finite
useful lives are reviewed for impairment when events or changes in circumstances
indicate that the carrying amount may not be recoverable. If any such indication exists,
and if the carrying amount exceeds the estimated recoverable amount, the assets or cashgenerating units are written down to their recoverable amounts. The recoverable amount
of the asset is the greater of fair value less costs to sell and value in use. The fair value
less costs to sell is the amount obtainable from the sale of an asset in an arms length
transaction between knowledgeable, willing parties, less costs of disposal.
In assessing value in use, the estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset. For an asset that does not generate
largely independent cash inflows, the recoverable amount is determined for the cashgenerating unit to which the asset belongs. Impairment losses are recognized in the
consolidated statements of income in those expense categories consistent with the
function of the impaired asset.

F-28

An assessment is made at each reporting date as to whether there is any indication that
previously recognized impairment losses may no longer exist or may have decreased. If
such indication exists, the recoverable amount is estimated. A previously recognized
impairment loss is reversed only if there has been a change in the estimates used to
determine the assets recoverable amount since the last impairment loss was recognized.
If that is the case, the carrying amount of the asset is increased to its recoverable amount.
That increased amount cannot exceed the carrying amount that would have been
determined, net of depreciation and amortization, had no impairment loss been
recognized for the asset in prior years. Such reversal is recognized in the consolidated
statements of income. After such a reversal, the depreciation and amortization charge is
adjusted in future periods to allocate the assets revised carrying amount, less any
residual value, on a systematic basis over its remaining useful life.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. The fair
value measurement is based on the presumption that the transaction to sell the asset or
transfer the liability takes place either in the principal market for the asset or liability, or
in the absence of a principal market, in the most advantageous market for the asset or
liability. The principal or most advantageous market must be accessible to the Group.
The fair value of an asset or a liability is measured using the assumptions that market
participants would use when pricing the asset or liability, assuming that market
participants act in their best economic interest.
The Group uses valuation techniques that are appropriate in the circumstances and for
which sufficient data are available to measure fair value, maximizing the use of relevant
observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the consolidated
financial statements are categorized within the fair value hierarchy, described as follows,
based on the lowest level input that is significant to the fair value measurement as a
whole:

Level 1: quoted prices (unadjusted) in active markets for identical assets or


liabilities;

Level 2: inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly; and

Level 3: inputs for the asset or liability that are not based on observable market
data.

For assets and liabilities that are recognized in the consolidated financial statements on a
recurring basis, the Group determines whether transfers have occurred between levels in
the hierarchy by re-assessing the categorization at the end of each reporting period.
For the purpose of fair value disclosures, the Group has determined classes of assets and
liabilities on the basis of the nature, characteristics and risks of the asset or liability and
the level of the fair value hierarchy.

F-29

Provisions
Provisions are recognized when: (a) the Group has a present obligation (legal or
constructive) as a result of past events; (b) it is probable (i.e., more likely than not) that
an outflow of resources embodying economic benefits will be required to settle the
obligation; and (c) a reliable estimate of the amount of the obligation can be made.
Where some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party, the reimbursement is recognized as a separate asset only
when it is virtually certain that reimbursement will be received. The amount recognized
for the reimbursement shall not exceed the amount of the provision. Provisions are
reviewed at each reporting date and adjusted to reflect the current best estimate.
If the effect of the time value of money is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects current market
assessment of the time value of money and the risks specific to the liability. Where
discounting is used, the increase in the provision due to the passage of time is recognized
as interest expense.
Capital Stock and Additional Paid-in Capital
Common shares. Common shares are measured at par and are classified as equity.
Incremental costs directly attributable to the issue of common shares are recognized as a
deduction from equity, net of any tax effects.
Additional Paid-in Capital. When the shares are sold at premium, the difference between
the proceeds and the par value is credited to the Additional paid-in capital account.
When shares are issued for a consideration other than cash, the proceeds are measured by
the fair value of the consideration received. In case the shares are issued to extinguish or
settle the liability of the Parent Company, the shares are measured either at the fair value
of the shares issued or fair value of the liability settled, whichever is more reliably
determinable.
Undated Subordinated Capital Securities
Undated subordinated capital securities are classified as equity when there is no
contractual obligation to deliver cash or other financial assets to another person or entity
or to exchange financial assets or financial liabilities with another person or entity that is
potentially unfavorable to the issuer.
Incremental costs directly attributable to the issuance of undated subordinated capital
securities are recognized as a deduction from equity, net of tax. The proceeds received
net of any directly attributable transaction costs are credited to undated subordinated
capital securities.
Retained Earnings
Retained earnings represent the accumulated net income or losses, net of any dividend,
distributions and other capital adjustments. Appropriated retained earnings represent that
portion which is restricted and therefore not available for any dividend declaration.

F-30

Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits
associated with the transaction will flow to the Group and the amount of revenue can be
reliably measured. Revenues are stated at amounts invoiced to customers, inclusive of
pass-through charges, net of value-added tax (VAT) and other taxes. The following
specific recognition criteria must also be met before revenue is recognized:
Sale of Power. Revenue from power generation and trading is recognized in the period
when actual power or capacity is generated, transmitted and/or made available to the
customers, net of related discounts and adjustments.
Retail and Other Power-related Services. Revenues are recognized upon the supply of
electricity to the customers. The Uniform Filing Requirements (UFR) on the rate
unbundling released by the Energy Regulatory Commission (ERC) on October 30, 2001
specified the following bill components: (a) generation charge, (b) transmission charge,
(c) system loss charge, (d) distribution charge, (e) supply charge, (f) metering charge,
(g) currency exchange rate adjustments, where applicable and (h) interclass and life
subsidies. Feed-in tariffs allowance, VAT, local franchise tax and universal charges are
billed and collected on behalf of the national and local government and do not form part
of the Groups revenue. Generation, transmission and system loss charges, which are part
of revenues, are pass-through charges.
Construction Revenue. Construction revenue related to the Groups recognition of
intangible asset on the right to operate ALECO, which is the fair value of the intangible
asset, is earned and recognized as the construction progresses. The Group recognizes the
corresponding amount as intangible asset as it recognizes the construction revenue. The
Group assumes no profit margin in earning the right to operate ALECO.
The Group uses the cost to cost percentage-of-completion method to determine the
appropriate amount of revenue to be recognized in a given period. The stage of
completion is measured by reference to the costs incurred related to the construction of
ALECO infrastructure up to the end of the reporting period as a percentage of total
estimated cost of the construction.
Others
Interest Income. Revenue is recognized as the interest accrues, taking into account the
effective yield on the asset.
Dividend. Dividend income is recognized when the Groups right as a shareholder to
receive the payment is established.
Rent Income. Rent income from operating lease is recognized on a straight-line basis over
the related lease terms. Lease incentives granted are recognized as an integral part of the
total rent income over the term of the lease.
Gain on Sale of Investment. Gain or loss is recognized if the Group disposes of its
investments in a subsidiary, associate or joint venture. Gain or loss is computed as the
difference between the proceeds of the disposed investment and its carrying amount,
including the carrying amount of goodwill, if any.
Cost and Expense Recognition
Costs and Expenses. Costs and expenses are decreases in economic benefits during the
accounting period in the form of outflows or decrease of assets or incurrence of liabilities
that result in decreases in equity, other than those relating to distributions to equity
participants. Cost of power sold is debited for the direct costs related to power
generation, retail and distribution of electricity, and/or trading. Expenses are recognized
when incurred.

F-31

Interest Expense and Other Financing Charges. Interest expense and other financing
charges comprise finance charges on finance lease liabilities, loans, concession payable
and other borrowings. Finance charges on finance lease liabilities, loans and concession
payable are recognized in consolidated statements of income using the effective interest
rate method.
Share-based Payment Transactions
Under the Groups Long-term Incentive Plan for Stock Options (LTIP) and Employee
Stock Purchase Plan (ESPP), executives and employees of the Group receive
remuneration in the form of share-based payment transactions, whereby the executives
and employees render services as consideration for equity instruments of SMC. Such
transactions are handled centrally by SMC.
Share-based transactions in which SMC grants option rights to its equity instruments
directly to the Groups employees are accounted for as equity-settled transactions.
The cost of LTIP is measured by reference to the option fair value at the date when the
options are granted. The fair value is determined using Black-Scholes option pricing
model. In valuing LTIP transactions, any performance conditions are not taken into
account, other than conditions linked to the price of the shares of SMC. ESPP is
measured by reference to the market price at the time of the grant less subscription price.
The cost of share-based payment transactions is recognized, together with a
corresponding increase in equity, over the period in which the performance and/or
service conditions are fulfilled, ending on the date when the relevant employees become
fully entitled to the award (the vesting date). The cumulative expenses recognized for
share-based payment transactions at each reporting date until the vesting date reflect the
extent to which the vesting period has expired and SMCs best estimate of the number
of equity instruments that will ultimately vest. Where the terms of a share-based award
are modified, as a minimum, an expense is recognized as if the terms had not been
modified. In addition, an expense is recognized for any modification, which increases the
total fair value of the share-based payment arrangement, or is otherwise beneficial to the
employee as measured at the date of modification.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of
cancellation, and any expense not yet recognized for the award is recognized
immediately.
However, if a new award is substituted for the cancelled award and designated as a
replacement award on the date that it is granted, the cancelled and new awards are treated
as if they were a modification of the original award.
Leases
The determination of whether an arrangement is, or contains, a lease is based on the
substance of the arrangement and requires an assessment of whether the fulfillment of the
arrangement is dependent on the use of a specific asset or assets and the arrangement
conveys a right to use the asset. A reassessment is made after the inception of the lease
only if one of the following applies:
(a) there is a change in contractual terms, other than a renewal or extension of the
arrangement;
(b) a renewal option is exercised or an extension is granted, unless the term of the
renewal or extension was initially included in the lease term;

F-32

(c) there is a change in the determination of whether fulfillment is dependent on a


specific asset; or
(d) there is a substantial change to the asset.
Where a reassessment is made, lease accounting shall commence or cease from the date
when the change in circumstances gives rise to the reassessment for scenarios (a), (c) or
(d), and at the date of renewal or extension period for scenario (b) above.
Finance Lease
Finance leases, which transfer to the Group substantially all the risks and rewards
incidental to ownership of the leased item, are capitalized at the inception of the lease at
the fair value of the leased property or, if lower, at the present value of the minimum
lease payments. Obligations arising from plant assets under finance lease agreement are
classified in the consolidated statements of financial position as finance lease liabilities.
Lease payments are apportioned between financing charges and reduction of the lease
liabilities so as to achieve a constant rate of interest on the remaining balance of the
liabilities. Financing charges are recognized in the consolidated statements of income.
Capitalized leased assets are depreciated over the estimated useful lives of the assets
when there is reasonable certainty that the Group will obtain ownership by the end of the
lease term.
Operating Lease
Group as Lessee. Leases which do not transfer to the Group substantially all the risks and
rewards of ownership of the asset are classified as operating leases. Operating lease
payments are recognized as an expense in the consolidated statements of income on a
straight-line basis over the lease term. Associated costs such as maintenance and
insurance are expensed as incurred.
Group as Lessor. Leases where the Group does not transfer substantially all the risks and
rewards of ownership of the assets are classified as operating leases. Rent income from
operating leases is recognized as income on a straight-line basis over the lease term.
Initial direct costs incurred in negotiating an operating lease are added to the carrying
amount of the leased asset and recognized as an expense over the lease term on the same
basis as rent income. Contingent rents are recognized as income in the period in which
they are earned.
Borrowing Costs
Borrowing costs directly attributable to the acquisition or construction of an asset that
necessarily takes a substantial period of time to get ready for its intended use are
capitalized as part of the cost of the respective assets. All other borrowing costs are
expensed in the period they occur. Capitalization of borrowing costs commences when
the activities to prepare the asset are in progress and expenditures and borrowing costs
are being incurred. Borrowing costs are capitalized until the assets are substantially
ready for their intended use.
Employee Benefits
Short-term Employee Benefits. Short-term employee benefits are expensed as the related
service is provided. A liability is recognized for the amount expected to be paid if the
Group has a present legal or constructive obligation to pay this amount as a result of past
service provided by the employee and the obligation can be estimated reliably.

F-33

Retirement Benefits. The defined benefit liability or asset is the aggregate of the present
value of the amount of future benefit that employees have earned in return for their
service in the current and prior periods, reduced by the fair value of plan assets (if any),
adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The
asset ceiling is the present value of economic benefits available in the form of reductions
in future contributions to the plan.
The cost of providing benefits under the defined benefit obligation is actuarially
determined using the projected unit credit method. Projected unit credit method reflects
services rendered by employees to the date of valuation and incorporates assumptions
concerning employees projected salaries. Actuarial gains and losses are recognized in
full in the period in which they occur in other comprehensive income. Such actuarial
gains and losses are also immediately recognized in equity and are not reclassified to
profit or loss in subsequent period.
Retirement benefit expense comprise the following:
Service costs
Net interest on the defined benefit liability or asset
Remeasurements of defined benefit liability or asset
Service costs which include current service costs, past service costs and gains or losses
on non-routine settlements are recognized as expense in the consolidated statements of
income. Past service costs are recognized when plan amendment or curtailment occurs.
These amounts are calculated periodically by independent qualified actuary.
Net interest on the defined benefit liability or asset is the change during the period as a
result of contributions and benefit payments, which is determined by applying the
discount rate based on the government bonds to the defined benefit liability or asset. Net
interest on the defined benefit liability or asset is recognized as expense or income in the
consolidated statements of income.
Remeasurements of net defined benefit liability or asset comprising actuarial gains and
losses, return on plan assets, and any change in the effect of the asset ceiling (excluding
net interest) are recognized immediately in other comprehensive income in the period in
which they arise. Remeasurements are not reclassified to consolidated statements of
income in subsequent periods.
When the benefits of a plan are changed, or when a plan is curtailed, the resulting change
in benefit that relates to past service or the gain or loss on curtailment is recognized
immediately in the consolidated statements of income. The Group recognizes gains and
losses on the settlement of a defined benefit liability when the settlement occurs.
Foreign Currency Translations
Transactions in foreign currencies are translated to the functional currency of the Group
entities at exchange rates at the dates of the transactions. Monetary assets and monetary
liabilities denominated in foreign currencies are retranslated at the functional currency
rate of exchange ruling at the reporting date. The foreign currency gain or loss on
monetary items is the difference between amortized cost in the functional currency at the
beginning of the year, adjusted for effective interest and payments during the year, and
the amortized cost in foreign currency translated at the exchange rate at the reporting
date.

F-34

Nonmonetary assets and nonmonetary liabilities denominated in foreign currencies that


are measured at fair value are translated to the functional currency at the exchange rate at
the date the fair value was determined. Nonmonetary items in foreign currencies that are
measured in terms of historical cost are translated using the exchange rate at the date of
the transaction.
Foreign currency differences arising on translation are recognized in the consolidated
statements of income, except for differences arising on the translation of AFS financial
assets, a financial liability designated as an effective hedge of the net investment in a
foreign operation or qualifying cash flow hedges, which are recognized in other
comprehensive income.
Taxes
Current Tax. Current tax is the expected tax payable or receivable on the taxable income
or loss for the year, using tax rates enacted or substantively enacted at the reporting date,
and any adjustment to tax payable in respect of previous years.
Deferred Tax. Deferred tax is recognized in respect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for taxation purposes.
Deferred tax liabilities are recognized for all taxable temporary differences, except:

where the deferred tax liability arises from the initial recognition of goodwill or of an
asset or liability in a transaction that is not a business combination and, at the time of
the transaction, affects neither the accounting profit nor taxable profit or loss; and

with respect to taxable temporary differences associated with investments in shares


of stock of subsidiaries, associates and interests in joint ventures, where the timing of
the reversal of the temporary differences can be controlled and it is probable that the
temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carryforward
benefits of unused tax credits - Minimum Corporate Income Tax (MCIT) and unused tax
losses - Net Operating Loss Carry Over (NOLCO), to the extent that it is probable that
taxable profit will be available against which the deductible temporary differences, and
the carryforward benefits of MCIT and NOLCO can be utilized, except:

where the deferred tax asset relating to the deductible temporary difference arises
from the initial recognition of an asset or liability in a transaction that is not a
business combination and, at the time of the transaction, affects neither the
accounting profit nor taxable profit or loss; and

with respect to deductible temporary differences associated with investments in


shares of stock of subsidiaries, associates and interests in joint ventures, deferred tax
assets are recognized only to the extent that it is probable that the temporary
differences will reverse in the foreseeable future and taxable profit will be available
against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced
to the extent that it is no longer probable that sufficient taxable profit will be available to
allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets
are reassessed at each reporting date and are recognized to the extent that it has become
probable that future taxable profit will allow the deferred tax asset to be recovered.

F-35

The measurement of deferred tax reflects the tax consequences that would follow the
manner in which the Group expects, at the end of the reporting period, to recover or settle
the carrying amount of its assets and liabilities.
Deferred tax assets and deferred tax liabilities are measured at the tax rates that are
expected to apply in the year when the asset is realized or the liability is settled, based on
tax rates (and tax laws) that have been enacted or substantively enacted at the reporting
date.
In determining the amount of current tax and deferred tax, the Group takes into account
the impact of uncertain tax positions and whether additional taxes and interest may be
due. The Group believes that its accruals for tax liabilities are adequate for all open tax
years based on its assessment of many factors, including interpretation of tax laws and
prior experience. This assessment relies on estimates and assumptions and may involve a
series of judgments about future events. New information may become available that
causes the Group to change its judgment regarding the adequacy of existing tax
liabilities; such changes to tax liabilities will impact tax expense in the period that such a
determination is made.
Current tax and deferred tax are recognized in the consolidated statements of income
except to the extent that it relates to a business combination, or items recognized directly
in equity or in other comprehensive income.
Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right
exists to set off current tax assets against current tax liabilities and the deferred taxes
relate to the same taxable entity and the same taxation authority.
VAT. Revenues, expenses and assets are recognized net of the amount of VAT, except:

where the tax incurred on a purchase of assets or services is not recoverable from the
taxation authority, in which case the tax is recognized as part of the cost of
acquisition of the asset or as part of the expense item as applicable; and

receivables and payables that are stated with the amount of tax included.

The net amount of tax recoverable from, or payable to, the taxation authority is included
as part of Prepaid expenses and other current assets or Accounts payable and accrued
expenses accounts in the consolidated statements of financial position.
Related Parties
Parties are considered to be related if one party has the ability, directly or indirectly, to
control the other party or exercise significant influence over the other party in making
financial and operating decisions. Parties are also considered to be related if they are
subject to common control and significant influence. Related parties may be individuals
or corporate entities. Transactions between related parties are on an arms length basis in
a manner similar to transactions with non-related parties.
Basic and Diluted Earnings Per Common Share (EPS)
Basic EPS is computed by dividing the net income for the period attributable to equity
holders of the Parent Company, net of distributions to the holders of USCS, by the
weighted-average number of issued and outstanding common shares during the period.

F-36

For the purpose of computing diluted EPS, the net income for the period attributable to
equity holders of the Parent Company and the weighted-average number of issued and
outstanding common shares are adjusted for the effects of all potential dilutive
instruments.
As of December 31, 2015, 2014 and 2013, the Group has no dilutive equity instruments
as disclosed in Note 25 to the consolidated financial statements.
Operating Segments
The Groups operating segments are organized and managed separately according to the
services provided, with each segment representing a strategic business unit that offers
different economic characteristic and activities. The Chief Executive Officer (the chief
operating decision maker; CODM) reviews management reports on a regular basis.
The measurement policies the Group used for segment reporting under PFRS 8 are the
same as those used in the consolidated financial statements. There have been no changes
in the measurement methods used to determine reported segment profit or loss from prior
periods. All inter-segment transfers are carried out at arms length prices.
Segment revenues, expenses and performance include sales and purchases between
business segments. Such sales and purchases are eliminated in consolidation.
Contingencies
Contingent liabilities are not recognized in the consolidated financial statements. They
are disclosed in the notes to the consolidated financial statements unless the possibility of
an outflow of resources embodying economic benefits is remote. Contingent assets are
not recognized in the consolidated financial statements but are disclosed in the notes to
the consolidated financial statements when an inflow of economic benefits is probable.
Events After the Reporting Date
Post year-end events that provide additional information about the Groups financial
position at the reporting date (adjusting events) are reflected in the consolidated financial
statements. Post year-end events that are not adjusting events are disclosed in the notes to
the consolidated financial statements when material.

4. Significant Accounting Judgments, Estimates and Assumptions


The preparation of the consolidated financial statements in accordance with PFRS
requires management to make judgments, estimates and assumptions that affect the
application of accounting policies and the amounts of assets, liabilities, income and
expenses reported in the consolidated financial statements at the reporting date.
However, uncertainty about these judgments, estimates and assumptions could result in
an outcome that could require a material adjustment to the carrying amount of the
affected asset or liability in the future.
Judgments, estimates and assumptions are continually evaluated and are based on
historical experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances. Revisions are recognized in the period
in which the judgments, estimates and assumptions are revised and in any future period
affected.

F-37

Judgments
In the process of applying the Groups accounting policies, management has made the
following judgments, apart from those involving estimations, which have the most
significant effect on the amounts recognized in the consolidated financial statements:
Finance Lease - Group as Lessee. In accounting for its Independent Power Producer
Administration (IPPA) Agreements with the Power Sector Assets and Liabilities
Management Corporation (PSALM), the Groups management has made a judgment that
the IPPA Agreements are agreements that contain a lease.
The Groups management has made a judgment that it has substantially acquired all the
risks and rewards incidental to the ownership of the power plants. Accordingly, the
Group accounted for the agreements as a finance lease and recognized the power plants
and finance lease liabilities at the present value of the agreed monthly payments to
PSALM (Notes 7 and 12).
Finance lease liabilities recognized in the consolidated statements of financial position
amounted to P179,193,193 and P186,303,745 as of December 31, 2015 and 2014,
respectively (Note 7).
The combined carrying amounts of power plants under finance lease amounted to
P182,946,297 and P188,132,700 as of December 31, 2015 and 2014, respectively
(Note 12).
Operating Lease Commitments - Group as Lessor/Lessee. The Group has entered into
various lease agreements either as a lessor or a lessee. The Group had determined that it
retains all the significant risks and rewards of ownership of the property leased out on
operating leases while the significant risks and rewards for property leased from third
parties and related parties are retained by the lessors (Note 7).
Rent income recognized in the consolidated statements of income amounted to P28,104,
P18,434 and nil in 2015, 2014 and 2013, respectively (Note 22).
Rent expense recognized in the consolidated statements of income amounted to
P360,091, P115,849 and P24,167 in 2015, 2014 and 2013, respectively (Note 21).
Applicability of Philippine Interpretation IFRIC 12 - Concession Right. In accounting for
the Groups transactions in connection with its Concession Agreement with ALECO,
significant judgment was applied to determine the most appropriate accounting policy to
use.
Management used Philippine Interpretation IFRIC 12 as guide and determined that the
Concession Agreement is within the scope of the Interpretation and should be accounted
for under the intangible asset model (Notes 3, 7 and 14).
Contingencies. The Group is currently involved in various pending claims and cases
which could be decided in favor of or against the Group. The Groups estimate of the
probable costs for the resolution of these pending claims and cases has been developed in
consultation with in-house as well as outside legal counsel handling the prosecution and
defense of these matters and is based on an analysis of potential results. The Groups
management and legal counsels currently do not believe that these pending claims and
cases will have a material adverse effect on its financial position and financial
performance. It is possible, however, that future financial performance could be
materially affected by the changes in the estimates or in the effectiveness of strategies
relating to these proceedings (Note 28).

F-38

Estimates and Assumptions


The key estimates and assumptions used in the consolidated financial statements are
based upon managements evaluation of relevant facts and circumstances as of the date
of the consolidated financial statements. Actual results could differ from such estimates.
Fair Value Measurements. The Group has an established control framework with respect
to the measurement of fair values. This includes a valuation team that has the overall
responsibility for overseeing all significant fair value measurements, including Level 3
fair values. The valuation team regularly reviews significant unobservable inputs and
valuation adjustments. If third party information is used to measure fair values, then the
valuation team assesses the evidence obtained to support the conclusion that such
valuations meet the requirements of PFRS, including the level in the fair value hierarchy
in which such valuations should be classified.
The Group uses market observable data when measuring the fair value of an asset or
liability. Fair values are categorized into different levels in a fair value hierarchy based
on the inputs used in the valuation techniques (Note 3).
If the inputs used to measure the fair value of an asset or a liability can be categorized in
different levels of the fair value hierarchy, then the fair value measurement is categorized
in its entirety in the same level of the fair value hierarchy based on the lowest level input
that is significant to the entire measurement.
The Group recognizes transfers between levels of the fair value hierarchy at the end of
the reporting period during which the change has occurred.
The methods and assumptions used to estimate the fair values for both financial and
non-financial assets and liabilities are discussed in Note 27.
Allowance for Impairment Losses on Trade and Other Receivables. Provisions are made
for specific and groups of accounts, where objective evidence of impairment exists. The
Group evaluates these accounts on the basis of factors that affect the collectability of the
accounts. These factors include, but are not limited to, the length of the Groups
relationship with the customers and counterparties, the current credit status based on third
party credit reports and known market forces, average age of accounts, collection
experience and historical loss experience. The amount and timing of the recorded
expenses for any period would differ if the Group made different judgments or utilized
different methodologies. An increase in the allowance for impairment losses would
increase the recorded expenses and decrease current assets.
The allowance for impairment losses on trade and other receivables amounted to
P1,241,487 and P866,686 as of December 31, 2015 and 2014, respectively. The carrying
amount of trade and other receivables amounted to P18,473,625 and P18,208,339 as of
December 31, 2015 and 2014, respectively (Note 9).
Write-down of Inventory. The Group writes down the cost of inventory to its net
realizable value whenever net realizable value becomes lower than cost due to damage,
physical deterioration, obsolescence, changes in price levels or other causes.
Estimates of net realizable value are based on the most reliable evidence available at the
time the estimates are made of the amount the inventories are expected to be realized.
These estimates take into consideration fluctuations of price or cost directly relating to
events occurring after the reporting date to the extent that such events confirm conditions
existing at the reporting date.

F-39

The Group assessed that no write-down of inventories to net realizable value is necessary
as of December 31, 2015 and 2014.
The carrying amount of inventories amounted to P1,263,218 and P1,365,033 as of
December 31, 2015 and 2014, respectively (Note 10).
Estimated Useful Lives of Property, Plant and Equipment. The Group estimates the
useful lives of property, plant and equipment based on the period over which the assets
are expected to be available for use. The estimated useful lives of property, plant and
equipment are reviewed periodically and are updated if expectations differ from previous
estimates due to physical wear and tear, technical or commercial obsolescence and legal
or other limits on the use of the assets.
In addition, estimation of the useful lives of property, plant and equipment is based on
collective assessment of industry practice, internal technical evaluation and experience
with similar assets. It is possible, however, that future financial performance could be
materially affected by changes in estimates brought about by changes in factors
mentioned above. The amounts and timing of recorded expenses for any period would be
affected by changes in these factors and circumstances. A reduction in the estimated
useful lives of property, plant and equipment would increase the recorded cost and
expenses and decrease noncurrent assets.
Property, plant and equipment, net of accumulated depreciation and amortization,
amounted to P255,452,996 and P228,133,323 as of December 31, 2015 and 2014,
respectively. Accumulated depreciation and amortization of property, plant and
equipment amounted to P33,916,821 and P27,404,427 as of December 31, 2015 and
2014, respectively (Note 12).
Estimated Useful Lives of Intangible Assets. The useful lives of intangible assets are
assessed at the individual asset level as having either a finite or indefinite life. Intangible
assets are regarded to have an indefinite useful life when, based on analysis of all of the
relevant factors, there is no foreseeable limit to the period over which the asset is
expected to generate net cash inflows for the Group.
Intangible assets with finite useful lives amounted to P2,404,383 and P2,313,375 as of
December 31, 2015 and 2014, respectively (Note 14).
Impairment of Goodwill. The Group determines whether the goodwill acquired in
business combination are impaired at least annually. This requires the estimation of value
in use of the cash-generating units to which the goodwill is allocated. Estimating value in
use requires management to make an estimate of the expected future cash flows from the
cash-generating unit and to choose a suitable discount rate to calculate the present value
of those cash flows.
The carrying amount of goodwill amounted to P8,866 as of December 31, 2015 and 2014
(Note 14).
Acquisition Accounting. The Group accounts for acquired businesses using the
acquisition method of accounting which requires that the assets acquired and the
liabilities assumed be recognized at the date of acquisition based on their respective fair
values.

F-40

The application of the acquisition method requires certain estimates and assumptions
especially concerning the determination of the fair values of acquired property, plant and
equipment and intangible assets as well as liabilities assumed at the acquisition date.
Moreover, the useful lives of the acquired property, plant and equipment and intangible
assets have to be determined. Accordingly, for significant acquisitions, the Group
obtains assistance from valuation specialists. The valuations are based on information
available at the acquisition date.
Recoverability of Deferred Exploration and Development Costs. A valuation allowance
is provided for estimated unrecoverable deferred exploration and development costs
based on the Group's assessment of the future prospects of the mining properties,
which are primarily dependent on the presence of economically recoverable reserves in
those properties.
The Groups mining activities are all in the exploratory stages as of December 31, 2015.
All related costs and expenses from exploration are currently deferred as exploration and
development costs to be amortized upon commencement of commercial operations. The
Group has not identified any facts and circumstances which suggest that the carrying
amount of the deferred exploration and development costs exceeded the recoverable
amounts as of December 31, 2015 and 2014.
Deferred exploration and development costs amounted to P689,548 and P671,783 as of
December 31, 2015 and 2014, respectively (Note 6).
Realizability of Deferred Tax Assets. The Group reviews its deferred tax assets at each
reporting date and reduces the carrying amount to the extent that it is no longer probable
that sufficient taxable profit will be available to allow all or part of the deferred tax assets
to be utilized. The Groups assessment on the recognition of deferred tax assets on
deductible temporary difference and carryforward benefits of MCIT and NOLCO is
based on the projected taxable income in the following periods.
Deferred tax assets arising from MCIT and NOLCO have not been recognized because
the management believes that it is not probable that future taxable income will be
available against which the Group can utilize the benefits therefrom (Note 23).
Deferred tax assets from temporary differences amounted to P2,745,943 and P2,779,380
as of December 31, 2015 and 2014, respectively (Note 23).
Impairment of Non-financial Assets. PFRS requires that an impairment review be
performed on property, plant and equipment, investments and advances, deferred
exploration and development costs and intangible assets and goodwill with finite useful
lives when events or changes in circumstances indicate that the carrying amounts may
not be recoverable. Determining the recoverable amounts of these assets requires the
estimation of cash flows expected to be generated from the continued use and ultimate
disposition of such assets. While it is believed that the assumptions used in the estimation
of fair values reflected in the consolidated financial statements are appropriate and
reasonable, significant changes in these assumptions may materially affect the
assessment of recoverable amounts and any resulting impairment loss could have a
material adverse impact on the financial performance.
The Group assessed that its non-financial assets are not impaired as of December 31,
2015 and 2014.

F-41

The combined carrying amounts of property, plant and equipment, investments and
advances, deferred exploration and development costs and other intangible assets with
finite useful lives amounted to P269,159,864 and P241,730,758 as of December 31, 2015
and 2014, respectively (Notes 6, 12, 13 and 14).
Present Value of Defined Benefit Obligation. The present value of the defined benefit
obligation depends on a number of factors that are determined on an actuarial basis using
a number of assumptions. These assumptions are described in Note 19 to the
consolidated financial statements and include discount rate and salary increase rate.
The Group determines the appropriate discount rate at the end of each reporting period. It
is the interest rate that should be used to determine the present value of estimated future
cash outflows expected to be required to settle the retirement obligations. In determining
the appropriate discount rate, the Group considers the interest rates on government bonds
that are denominated in the currency in which the benefits will be paid. The terms to
maturity of these bonds should approximate the terms of the related retirement
obligation.
Other key assumptions for the defined benefit obligation are based in part on current
market conditions.
While it is believed that the Groups assumptions are reasonable and appropriate,
significant differences in actual experience or significant changes in assumptions may
materially affect the Groups defined benefit obligation.
The present value of defined benefit obligation amounted to P45,657 and P16,692 as of
December 31, 2015 and 2014, respectively (Note 19).
Asset Retirement Obligation. Determining ARO requires estimation of the cost of
dismantling property, plant and equipment and other costs of restoring the leased
properties to their original condition. The Group determined that there are no ARO as of
December 31, 2015 and 2014.

5. Segment Information
Operating Segments
The Groups operations are segmented into four businesses: a) power generation,
b) retail and other power-related services, c) coal mining and d) others consistent with the
reports prepared internally for use by the Groups CODM in reviewing the business
performance of the operating segments. The differing economic characteristics and
activities of these power plants make it more useful to users of the consolidated financial
statements to have information about each component of the Groups profit or loss, assets
and liabilities.
The coal mining companies, which were acquired in 2010, have not yet started
commercial operations and are in the exploratory stage of mining activities (Note 6). The
mining companies total assets do not exceed 10% of the combined assets of all operating
segments. Accordingly, management believes that as of December 31, 2015 and 2014,
the information about this component of the Group would not be useful to the users of
the consolidated financial statements.

F-42

The Groups inter-segment sale of power are accounted for based on contracts entered
into by the parties and are eliminated in the consolidation. Segment assets do not include
investments and advances, intangible assets and goodwill and deferred tax assets. The
investment in Manila Electric Company (Meralco) and subsequent transactions affecting
investment in Meralco are presented under Others. Segment liabilities do not include
long-term debt, deferred tax liabilities and income tax payable. Capital expenditures
consist of additions to property, plant and equipment of each reportable segment.
The Group operates only in the Philippines which is treated as a single geographical
segment.
Major Customers
The Group sells, retails and distributes power, through power supply agreements, retail
supply agreements, concession agreement and other power-related service agreements
(Note 7), either directly to customers (other generators, distribution utilities, electric
cooperatives and industrial customers) or through the Philippine Wholesale Electricity
Spot Market (WESM). Sale, retail and/or distribution of power to individual external
customers that represents 10% or more of the Groups total revenues is as follows:
2015
P40,889,098
6,217,243

Meralco
WESM

F-43

2014
P47,233,747
9,622,839

2013
P46,952,999
10,770,643

For management reporting purposes, the Groups operating segments are organized and managed separately as follows:
Operating Segments
Financial information about reportable segments follows:
For the Years Ended December 31

2015
Sale of Power
External
Inter-segment

Power Generation
2014

2013

Retail and Other


Power-related Services
2014
2013
2015

P73,849,465
6,769,834

P80,080,157
4,872,675

P73,882,922
2,103,653

P3,657,226
-

P4,213,433 P160,865
-

2015

Coal Mining
2014
2013

Others
2014

2013

2015

Eliminations
2014

2013

2015

P -

P -

P -

P -

P -

P -

P (6,769,834)

P (4,872,675)

P P77,506,691
(2,103,653)
-

(6,769,834)

(4,872,675)

(2,103,653)

80,619,299

84,952,832

75,986,575

3,657,226

4,213,433

160,865

Cost and Expenses


Cost of power sold
Operating expenses

51,933,914
4,791,985

56,304,969
2,697,961

53,919,111
1,635,443

3,723,643
226,397

4,053,848
37,204

139,164
7,951

17,831

23,919

15,345

56,725,899

59,002,930

55,554,554

3,950,040

4,091,052

147,115

17,831

23,919

15,345

Segment Result

23,893,400

25,949,902

20,432,021

122,381

13,750

(292,814)

2015

(17,831) (23,919) (15,345)

Interest income
Interest expense and other financing
charges
Equity in net earnings (losses) of
associates and joint ventures - net
Gain on sale of investment
Other income (charges) - net
Income tax expense - net
Consolidated Net Income

2013

P84,293,590
-

P74,043,787
-

77,506,691

84,293,590

74,043,787

48,899,927
4,904,135

55,486,142
2,911,930

51,954,622
1,547,750

1,294,215

767,846

504,093

(6,757,630)
(1,426,293)

(4,872,675)
(615,000)

(2,103,653)
(615,082)

1,294,215

767,846

504,093

(8,183,923)

(5,487,675)

(2,718,735)

53,804,062

58,398,072

53,502,372

615,082

23,702,629

25,895,518

20,541,415

414,444

549,977

447,843

(1,294,215) (767,846) (504,093)

1,414,089

615,000

(13,130,252)

(13,168,470)

(12,673,891)

(528,445)
(5,926,050)
(2,703,408)

(22,345)
68,225
(2,693,423)

795,004
2,587,044
(8,491,062)
836,302

P1,828,918

F-44

Consolidated
2014

P10,629,482

P4,042,655

For the Years Ended December 31


Power Generation
2014
2015
Other Information
Segment assets
Investments and advances - net
Intangible assets and goodwill
Deferred tax assets

P297,302,968
4,566,249

P249,966,190
1,975,929

Retail and Other


Power-related Services
2014
2015
P2,773,437
192,012

P2,419,373
191,549

Coal Mining
2014
2015
P749,318
-

P683,275
-

Others
2015

2014

P45,618,031 P54,904,121
8,444,799
43,451,916

Eliminations
2014
2015

(P31,006,033) (P9,937,570) P315,437,721


(37,597,240)
10,612,937
2,413,249
2,745,943

P298,035,389
10,612,277
2,322,241
2,779,380

P331,209,850

P313,749,287

(P33,751,269) (P10,037,078) P212,184,526


58,607,861
99,275
3,882,930

P215,092,035
48,713,245
151,360
3,043,470

P274,774,592

P267,000,110

P -

P33,832,821

P17,479,089

6,539,813
8,415,225

6,187,640
1,126,225

Consolidated Total Assets


Segment liabilities
Long-term debt
Income tax payable
Deferred tax liabilities

P240,770,768

P213,097,395

P2,788,300

P2,081,602

P763,125

P74,665

P1,613,602

P9,875,451

Consolidated Total Liabilities


Capital expenditures
Depreciation and amortization of property, plant
and equipment and intangible assets
Noncash items other than depreciation*

P31,066,140

P38,878

P2,893

6,469,103
6,363,892

6,143,959
1,021,839

21,394
164,633

P 14,686
11,074

P48
15,136
-

P15,087
18,098
(23)

P2,763,740 P17,425,124
22,181
2,051,797

10,897
93,335

P 11,999
(165,097)

*Noncash items other than depreciation and amortization include unrealized foreign exchange gain/losses, impairment losses on trade and other receivables, equity in net earnings (losses) of associates and joint ventures - net and retirement benefit expense.

F-45

Consolidated
2014
2015

6. Deferred Exploration and Development Costs


The movement in deferred exploration and development costs is as follows:
2015
P671,783
17,765
P689,548

Balance at beginning of year


Additions
Balance at end of year

2014
P525,999
145,784
P671,783

SMEC acquired DAMI, SEPC and BERI in 2010 resulting in the recognition of mining
rights of P1,719,726 (Note 14).
DAMIs coal property covered by Coal Operating Contract (COC) No. 126, issued by the
Department of Energy (DOE), is located in South Cotabato and consists of 2 coal blocks
with a total area of 2,000 hectares, more or less, and has an In-situ coal resources
(measured plus indicative coal resources) of about 93 million metric tons as of
December 31, 2015.
SEPC has a coal property and right over an aggregate area of 7,000 hectares, more or
less, composed of 7 coal blocks located in South Cotabato and Sultan Kudarat. As of
December 31, 2015, COC No. 134 has an In-situ coal resources (measured plus
indicative coal resources) of about 35 million metric tons.
BERIs COC No. 138, issued by the DOE is located in Sarangani and South Cotabato
consisting of 8 coal blocks with a total area of 8,000 hectares, more or less, and has an
In-situ coal resources (measured plus indicative coal resources) of about 24 million
metric tons as of December 31, 2015.
Status of Operations
In 2008 and 2009, the DOE approved the conversion of the COC for Exploration to COC
for Development and Production of DAMI, SEPC and BERI, respectively, effective on
the following dates:
Subsidiary
DAMI
SEPC
BERI

COC No.
126
134
138

Effective Date
November 19, 2008
February 23, 2009
May 26, 2009

Term*
10 years
10 years
10 years

* The term is followed by another 10-year extension, and thereafter, renewable for a series of 3 year periods not exceeding
12 years under such terms and conditions as may be agreed upon with the DOE.

On January 26, 2015, DOE granted the request by DAMI, SEPC and BERI for further
extension of the moratorium of their work commitments under their respective COCs.
The request is in connection with a resolution passed by South Cotabato in 2010
prohibiting open-pit mining activities in the area. The moratorium is retrospectively
effective from January 1, 2013 and is valid until December 31, 2016 or until the ban on
open-pit mining pursuant to the Environment Code of South Cotabato has been lifted,
whichever comes first.
As of December 31, 2015, DAMI, SEPC and BERI is in the exploratory stages of its
mining activities. All related costs and expenses from exploration are currently deferred
as exploration and development costs and will be amortized upon commencement of their
commercial operations.

F-46

The Group has not identified any facts and circumstances which suggest that the carrying
amount of deferred exploration and development costs exceeded recoverable amount as
of December 31, 2015 and 2014.

7. Agreements
a. Independent Power Producer (IPP) Administration (IPPA) Agreements
As a result of the biddings conducted by PSALM for the Appointment of the IPP
Administrator for the Contracted Capacity of the following power plants, the Group
was declared the winning bidder and act as IPP Administrator through the following
appointed subsidiaries:
Subsidiary
SMEC
SPDC
SPPC

Power Plant
Sual Coal - Fired Power Station
(Sual Power Plant)
San Roque Hydroelectric Multi-purpose
Power Plant (San Roque Power Plant)
Ilijan Natural Gas - Fired Combined Cycle
Power Plant (Ilijan Power Plant)

Location
Sual, Pangasinan
Province
San Roque, Pangasinan
Province
Ilijan, Batangas
Province

The IPPA Agreements are with the conformity of National Power Corporation
(NPC), a government-owned and controlled corporation created by virtue of
Republic Act (RA) No. 6395, as amended, whereby NPC confirms, acknowledges,
approves and agrees to the terms of the IPPA Agreements and further confirms that
for so long as it remains the counterparty of the IPP it will comply with its
obligations and exercise its rights and remedies under the original agreement with the
IPP at the request and instruction of PSALM.
The IPPA Agreements include, among others, the following common salient rights
and obligations:
i.

The right and obligation to manage and control the contracted capacity of the power
plant for its own account and at its own cost and risks;

ii. The right to trade, sell or otherwise deal with the capacity (whether pursuant to the
spot market, bilateral contracts with third parties or otherwise) and contract for or
offer related ancillary services, in all cases for its own account and at its own cost
and risks. Such rights shall carry the rights to receive revenues arising from such
activities without obligation to account therefore to PSALM or any third party;
iii. The right to receive a transfer of the power plant upon termination of the IPPA
Agreement at the end of the cooperation period or in case of buy-out;
iv. For SMEC and SPPC, the right to receive an assignment of NPCs interest to existing
short-term bilateral power supply contracts;
v. The obligation to supply and deliver, at its own cost, fuel required by the IPP and
necessary for the Sual Power Plant to generate the electricity required to be produced
by the IPP;
vi. Maintain the performance bond in full force and effect with a qualified bank; and

F-47

vii. The obligation to pay PSALM the monthly payments and energy fees in respect of all
electricity generated from the capacity, net of outages.
Relative to the IPPA Agreements, SMEC, SPDC and SPPC have to pay PSALM
monthly payments for 15 years until October 1, 2024, 18 years until April 26, 2028
and 12 years until June 26, 2022, respectively. Energy fees in 2015, 2014 and 2013
amounted to P23,224,178, P30,775,896 and P31,269,293, respectively. SMEC,
SPDC and SPPC renewed their performance bonds in United States dollar (US$)
amounting to US$58,187, US$20,305 and US$60,000 which will expire on
November 3, 2016, January 25, 2016 and June 16, 2016, respectively. Subsequently,
the performance bond of SPDC was renewed up to January 25, 2017.
The finance lease liabilities are carried at amortized cost using the US dollar and
Philippine peso discount rates as follows:
US Dollar
3.89%
3.85%
3.30%

SMEC
SPPC
SPDC

Philippine Peso
8.16%
8.05%
7.90%

The discount determined at inception of the agreement is amortized over the period
of the IPPA Agreement and recognized as part of Interest expense and other
financing charges account in the consolidated statements of income. Interest
expense in 2015, 2014 and 2013 amounted to P10,212,753, P10,711,071 and
P10,983,520, respectively.
The future minimum lease payments for each of the following periods are as follows:

US Dollar
Payments

2015
Not later than 1 year
More than 1 year and not later
than 5 years
Later than 5 years

P11,774,823

P11,980,712

P23,755,535

1,071,953
1,118,634

50,446,106
52,642,925

51,333,916
53,617,024

101,780,022
106,259,949

2,440,796

114,863,854

116,931,652

231,795,506

383,180

18,032,425

34,569,888

52,602,313

US$2,057,616

P96,831,429

P82,361,764

P179,193,193

US Dollar
Payments

Peso
Equivalent
of US Dollar
Payments

Peso Payments

Total

US$238,557

P10,668,258

P11,423,146

P22,091,404

1,027,007
1,413,789

45,927,750
63,224,641

49,178,287
67,753,365

95,106,037
130,978,006

2,679,353

119,820,649

128,354,798

248,175,447

462,375

20,677,383

41,194,319

61,871,702

US$2,216,978

P99,143,266

P87,160,479

P186,303,745

2014
Not later than 1 year
More than 1 year and not later
than 5 years
Later than 5 years
Less: Future finance charges on
finance lease liabilities
Present values of finance lease
liabilities

Total

US$250,209

Less: Future finance charges on


finance lease liabilities
Present values of finance lease
liabilities

Peso
Equivalent
of US Dollar
Payments Peso Payments

F-48

The present values of minimum lease payments for each of the following periods are
as follows:

2015
Not later than 1 year
More than 1 year and
not later than 5 years
Later than 5 years

US Dollar
Payments

Peso
Equivalent
of US Dollar
Payments

Peso
Payments

Total

US$197,094

P9,275,262

P7,271,501

P16,546,763

767,797
1,092,725

36,132,517
51,423,650

25,606,142
49,484,121

61,738,659
100,907,771

US$2,057,616

P96,831,429

P82,361,764

P179,193,193

US Dollar
Payments

Peso
Equivalent
of US Dollar
Payments

Peso
Payments

Total

US$194,970

P8,719,059

P7,486,165

P16,205,224

764,915
1,257,093

34,206,990
56,217,217

26,604,935
53,069,379

60,811,925
109,286,596

US$2,216,978

P99,143,266

P87,160,479

P186,303,745

2014
Not later than 1 year
More than 1 year and
not later than 5 years
Later than 5 years

b. Market Participation Agreements (MPA)


SMEC, SPDC and SPPC entered into an MPA with the Philippine Electricity Market
Corporation (PEMC) to satisfy the conditions contained in the Philippine WESM
Rules on WESM membership and to set forth the rights and obligations of a WESM
member. Under the WESM Rules, the cost of administering and operating the
WESM shall be recovered through a charge imposed on all WESM members or
transactions, as approved by the ERC. In 2015, 2014 and 2013, PEMCs market fees
charged to SMEC, SPDC and SPPC amounted to P219,681, P233,701 and P246,591,
respectively (Note 21).
In March 2013, SMELC entered into an MPA for Supplier as Direct WESM
Member - Customer Trading Participant Category with the PEMC to satisfy the
conditions contained in the Philippine WESM Rules on WESM membership and to
set forth the rights and obligations of a WESM member. SMELC has a standby letter
of credit, expiring on December 26, 2016, to secure the full and prompt performance
of obligations for its transactions as a Direct Member and trading participant in the
WESM.
c. Power Supply Agreements
SMEC, SPPC, SPDC, SMELC and SPI have Power Supply Agreements with various
counterparties, including related parties, to sell electricity produced by the power
plants. All agreements provide for renewals or extensions subject to mutually agreed
terms and conditions by the parties.

F-49

Certain customers, like electric cooperatives, are billed based on the time-of-use
(TOU) per kilowatt hour (kWh) while others are billed at capacity-based rate. As
stipulated in the contracts, each TOU-based customer has to pay the minimum charge
based on the contracted power using the basic energy charge and/or adjustments if
customer has not fully taken or failed to consume the contracted power. For capacitybased contracts, the customers are charged with the capacity fees based on the
contracted capacity even if there is no associated energy taken during the month.
SMEC, SPPC and SPDC purchase power from WESM and other power generation
companies during periods when the power generated from the power plants is not
sufficient to meet customers power requirements.
d. Coal Supply Agreements
SMEC and SPI, through its operation and maintenance (O&M) service provider,
have supply agreements with various coal suppliers for their power plants coal
requirements.
e. Operations and Maintenance Services Agreement
In exchange for the O&M services rendered by Petron Corporation (Petron), an entity
under common control, SPI pays for all the documented costs and expenses incurred
in relation to the operation, maintenance and repair of the power plant. The
agreement is effective for 25 years from September 2013 until 2038.
f.

Retail Supply Agreements


SMELC has retail supply agreements with customers to supply or sell electricity
purchased from WESM and SMEC. All agreements provide for renewals or
extensions subject to terms and conditions mutually agreed by the parties.
The customers are billed based on the capacity charge and associated energy charge.
As stipulated in the contracts, each customer has to pay the capacity charge based on
the contracted capacity using the capacity fee and associated energy fee with
adjustments if customer has not fully taken or failed to consume the contracted
capacity.

g. Lease Agreements
Group as Lessee
i.

The Group has operating lease agreements with San Miguel Properties, Inc.
(SMPI), an entity under common control, for a period of 1 to 6 years which is
renewable annually or upon agreement between parties.

ii. SPI subleases its plant premises from New Ventures Realty Corporation
(NVRC), an entity under common control. The existing lease agreement is for a
25-year period up to September 30, 2038, subject to renewal. The yearly rental is
subject to an automatic 3.0% per annum escalation rate for the 4 years following
the negotiation under the lease terms.
iii. SMEC entered into a lease agreement with Challenger Aero Air Corporation
(Challenger), an entity under common control, for the lease of certain aircrafts
for a period of 1 year from October 1, 2014 to September 30, 2015.

F-50

The lease agreement was pre-terminated on April 30, 2015.


Subsequently, SMEC entered into a new lease agreement with Challenger for the
lease of the same aircrafts for a period of 1 year from May 1, 2015 to
April 30, 2016 for a monthly rental of P25,000. Under the terms of the
agreement, SMEC paid security deposits amounting to P572,876.
iv. On November 3, 2015, SCPC leased a parcel of land with a total area of 96,663
square meters from NVRC for a period of 25 years from the effective date. SCPC
has the option to renew the lease for a further 25 years. Upon execution of the
agreement, the lump sum of P23,786 and a monthly rental of P1,081 covering 1
year is paid in advance. The monthly rental rate of P1,081 shall be increased
annually by 6.0% starting with the second anniversary of the lease execution.
v. On November 5, 2015, SCPC entered into another agreement with NVRC for the
lease of a parcel of land with a total area of 274,265 square meters for the
development and construction of an Ash Dump Facility for its power plant. The
initial term of the lease is for a period of 25 years with the option to renew for a
further 25 years. The rental rate is P1,371 for the first twelve months and
thereafter, on each anniversary of the lease execution, the monthly rental shall be
increased by 5.5%.
vi. On December 7, 2015, LPPC leased a total of 11,008 square meters from NVRC
for a period of 25 years from the effective date. LPPC has the option to renew
this lease for another 25 years. The rental rate is P2,300 for the first 12 months
and thereafter, starting with the second anniversary of the lease execution, the
agreed monthly rental shall be increased annually by 6.0%.
vii. DAMI leases its land in General Santos City with SMC. The existing lease
agreement is for a 10-year period up to June 30, 2023, subject to renewal. The
monthly rental rate is P28 for the first 12 months, subject to an automatic 10.0%
per annum escalation rate. Rent for the year, capitalized in Deferred exploration
and development costs account in the consolidated statements of financial
position, amounted to P405 and P336 as of December 31, 2015 and 2014,
respectively.
Relative to the lease agreements, the Group was required to pay advance rental and
security deposits which are included under Trade and other receivables - net or
Prepaid expenses and other current assets accounts in the consolidated statements
of financial position (Notes 9 and 11).
Future minimum lease payments under the non-cancellable operating lease
agreements are as follows:

Within 1 year
After 1 year but not more than
5 years
More than 5 years

2015
P63,593

2014
P24,732

2013
P23,270

138,776
1,381,648
P1,584,017

26,315
2
P51,049

62,289
P85,559

Rent expense recognized in the consolidated statements of income amounted to


P360,091, P115,849 and P24,167 in 2015, 2014 and 2013, respectively (Note 21).

F-51

Group as Lessor
i.

In 2014, the Parent Company has an operating sub-lease agreement with Clariden
Holdings, Inc., an entity under common control, for a period of 2 years which is
renewable upon agreement between the parties.

ii. In July 2011, GPII entered into an agreement with Limay Energen Corporation
(LEC), an entity under common control, to lease a parcel of land located in
Limay, Bataan, with a total area of 25,981 square meters. The lease term is for a
period of 10 years up to July 2021, with an option to renew not later than 6
months prior to expiration. Monthly rental for the first year of the term is P2,033
with an escalation rate of 3.0% every year from signing of the contract. LEC
executed a deed of assignment lease on July 19, 2012, assigning all rights and
obligations to the leased area to Petron. Petron is the assignee for the remaining
period of the lease effective June 1, 2012.
iii. In May 2011, GPII entered into an agreement with NVRC, for the lease of
certain parcels of land located in Limay, Bataan with a total area of 612,193
square meters. The lease term is for a period of 10 years up to May 2021, with an
option to renew not later than 6 months prior to expiration. Monthly rental for the
first year of the term is P1,983 with an escalation rate of 3.0% every year from
signing of the contract. This Agreement was amended on December 29, 2015,
reducing the leased area to 340,646 square meters effective October 1, 2013.
There are no restrictions imposed on these lease agreements such as those
concerning dividends, additional debt and further leasing.
Future minimum lease receivables under the non-cancellable operating lease
agreements are as follows:

Within 1 year
After 1 year but not more than 5 years
More than 5 years

2015
P46,517
183,394
20,204
P250,115

2014
P7,200
3,957
P11,157

Rent income recognized in the consolidated statements of income amounted to


P28,104, P18,434 and nil in 2015, 2014 and 2013, respectively (Note 22).
h. Concession Agreement
The Parent Company entered into a 25-year Agreement with ALECO on
October 29, 2013. It became effective upon confirmation of the National
Electrification Administration on November 7, 2013.
On January 24, 2014, the Parent Company and APEC entered into an Assignment
Agreement whereby APEC assumed all the rights, interests and obligations of the
Parent Company under the Concession Agreement effective January 2, 2014.

F-52

The Concession Agreement include, among others, the following rights and
obligations: i) as Concession Fee, APEC shall pay to ALECO: (1) separation pay of
ALECO employees in accordance with the Concession Agreement; (2) the amount of
P2,100 every quarter for the upkeep of residual ALECO (fixed concession fees); ii) if
the net cash flow of APEC is positive within 5 years or earlier from date of signing of
the Concession Agreement, 50% of the Net Cash Flow each month shall be deposited
in an escrow account until the cumulative nominal sum reaches P4,048,529; iii) on
the 20th anniversary of the Concession Agreement, the concession period may be
extended by mutual agreement between ALECO and APEC; and iv) at the end of the
concession period, all assets and system, as defined in the Concession Agreement,
shall be returned by APEC to ALECO in good and usable condition. Additions and
improvements to the system shall likewise be transferred to ALECO. In this regard,
APEC shall provide services within the franchise area and shall be allowed to collect
fees and charges, as approved by the ERC. ALECO formally turned over the
operations to APEC on February 26, 2014.
The Group recognized as intangible assets all costs directly related to the Concession
Agreement. The intangible assets consist of: a) concession rights, which include
fixed concession fees and separation pay of ALECO employees amounting to
P384,317. Fixed concession fees are recognized at present value using the discount
rate at the inception date with a corresponding concession payable recognized; and
b) infrastructure, which includes the costs of structures and improvements,
distribution system and equipment. Cost of infrastructure amounted to P159,086 and
P111,995 as of December 31, 2015 and 2014, respectively. Interest expense on
concession payable is included as part of Interest expense and other financing
charges account in the consolidated statements of income amounted to P6,254,
P4,769 and nil in 2015, 2014 and 2013, respectively. Amortization of concession
assets recognized in the Depreciation and amortization account in the consolidated
statements of income amounted to P21,296, P14,610 and nil in 2015, 2014 and 2013,
respectively.
Maturities of the carrying amount of concession payable are as follows:
2015
P2,273
10,515
94,110
P106,898

2014
P2,146
9,929
96,969
P109,044

2015

2014

Cost
Balance at beginning of year
Additions
Balance at end of year

P496,312
47,091
543,403

P 496,312
496,312

Accumulated Amortization
Balance at beginning of year
Amortization
Balance at end of year

14,610
21,296
35,906

14,610
14,610

P507,497

P481,702

Within 1 year
After 1 year but not more than 5 years
More than 5 years

Power concession assets consist of:


Note

14

F-53

The Group accounted for revenue and costs relating to construction or upgrade
services in accordance with PAS 11 based on the stage of completion of work
performed. The fair value of the construction and upgrade services provided is equal
to the recorded cost of the intangible asset built up from day one until the
construction activity ceases. Construction revenue and construction cost amounted to
P47,091, P111,995 and nil in 2015, 2014 and 2013, respectively.
i.

Memorandum of Agreement (MOA) with San Roque Power Corporation (SRPC)


On December 6, 2012, SPDC entered into a 5-year MOA with SRPC to sell a portion
of the capacity of the San Roque Power Plant. Under the MOA, i) SRPC shall
purchase a portion of the capacity sourced from the San Roque Power Plant;
ii) SRPC shall pay a settlement amount to SPDC for the capacity; and iii) the MOA
may be earlier terminated or extended subject to terms and mutual agreement of the
parties.
Revenue from sale of capacity of the San Roque Power Plant amounted to
P1,274,893, P1,488,437 and P577,192 in 2015, 2014 and 2013, respectively, and was
recognized as part of Sale of power account in the consolidated statements of
income.

8. Cash and Cash Equivalents


Cash and cash equivalents consist of:
Note
Cash in banks and on hand
Short-term investments
26, 27

2015
P4,390,785
17,850,576
P22,241,361

2014
P9,043,630
29,260,664
P38,304,294

Cash in banks earn interest at the respective bank deposit rates. Short-term investments
include demand deposits which can be withdrawn at anytime depending on the
immediate cash requirements of the Group and earn interest at the respective short-term
investment rates. Interest income from cash and cash equivalents amounted to P261,338,
P356,852 and P384,637 in 2015, 2014 and 2013, respectively.

9. Trade and Other Receivables


Trade and other receivables consist of:

Trade
Other receivables
Less allowance for impairment losses:
Trade
Other receivables

F-54

Note
18

2015
P13,448,756
6,266,356
19,715,112

2014
P13,195,630
5,879,395
19,075,025

18

1,031,784
209,703
1,241,487

866,686
866,686

26, 27

P18,473,625

P18,208,339

Trade and other receivables are non-interest bearing, unsecured and are generally on a
30-day term or an agreed collection period. The balance of trade receivables is inclusive
of VAT on the sale of power collectible from customers.
The movements in the allowance for impairment losses on trade and other receivables are
as follows:
2015
P866,686
374,801
P1,241,487

Balance at beginning of year


Impairment losses during the year
Balance at end of year

2014
P722,293
144,393
P866,686

Impairment losses is recognized in profit or loss as follows:

Operating expenses
Other income (charges)

Note
21
22

2015
P142,658
232,143
P374,801

2014
P144,393
P144,393

2013
P32,850
P32,850

The aging of trade and other receivables as of December 31 are as follows:

Current
Past due:
Less than 30 days
30-60 days
61-90 days
Over 90 days

Trade

2014
Other
Receivables

Total

P6,703,992

P3,298,074

P10,002,066

629,579
431,835
3,140,593
8,318,096

1,125,712
574,608
194,855
4,596,463

137,125
141,560
3,097
2,299,539

1,262,837
716,168
197,952
6,896,002

P19,715,112

P13,195,630

P5,879,395

P19,075,025

Trade

2015
Other
Receivables

Total

P6,318,467

P876,542

P7,195,009

577,945
376,895
201,639
5,973,810

51,634
54,940
2,938,954
2,344,286

P13,448,756

P6,266,356

Past due trade receivables by more than 30 days pertain mainly to output VAT. The
Group believes that the unimpaired amounts that are past due are still collectible based on
historical payment behavior and analyses of the underlying customer credit ratings. There
are no significant changes in their credit quality. There were no write-offs or reversals in
2015, 2014 and 2013.
Other receivables include the following:
a. On June 16, 2011, SMEC entered into a MOA with Hardrock Coal Mining Pty Ltd.
(HCML) and Caason Investments Pty Ltd. (Caason), companies registered in
Australia, for the acquisition of shares in HCML. SMEC paid Caason Australian
dollars 12,000 (equivalent to P550,000), for an option to subscribe to the shares in
HCML (the Deposit) with further option for SMEC to decide not to pursue its
investment in HCML, which will result in the return of the Deposit to SMEC plus
interest. In a letter dated July 15, 2011, SMEC notified Caason and HCML that it
shall not pursue the said investment and therefore asked Caason and HCML for the
return of the Deposit with corresponding interest (the Amount Due), pursuant to the
terms of the MOA.

F-55

On September 2, 2014, SMEC, HCML and Caason agreed to a schedule of payment


of the outstanding Amount Due to SMEC. For the years ended December 31, 2015
and 2014, HCML and Caason has paid a total amount of P107,086 and P119,841,
respectively, inclusive of interest and other payments, such as legal costs and
expenses. Interest income amounted to P105,735, P118,824 and P25,015 in 2015,
2014 and 2013, respectively. As of December 31, 2015 and 2014, total outstanding
receivables from HCML amounted to P203,099 (net of allowance for impairment
loss) and P566,155, respectively.
b. Pursuant to the MOA in respect of excess capacity of Sual Power Station, SMEC has
receivables from Team Philippines Energy Corp. (TPEC) and Team Sual Corporation
(TSC) for their share in fuel, market fees, coal and other charges related to the
operation of the Sual Power Plant amounting to P33,658 and P59,871 as of
December 31, 2015 and 2014, respectively. Likewise, SMEC has receivables from
TPEC for share in WESM transactions amounting to P1,083,353 and P926,583 as of
December 31, 2015 and 2014, respectively.
c. Due from PSALM amounting to US$60,000 which pertains to SPPCs performance
bond pursuant to the Ilijan IPPA Agreement that was drawn by PSALM in
September 2015. The validity of PSALM's action is the subject of an ongoing case
filed by SPPC with the Regional Trial Court of Mandaluyong City (Note 28).
d. Advances to suppliers for the deposits made to certain suppliers in 2014 for the
ongoing construction of 2 x 150 Mega Watt (MW) Coal-Fired Power Plant.
e. The Parent Companys receivable from the sale of investment in an associate
amounting to P16,228,991. The Parent Company collected the receivable from J.G.
Summit Holdings, Inc. (J.G. Summit) in 2014 (Note 13).
f.

The balance mainly pertains to receivables from customers related to power rate
adjustments which will be remitted to the Government upon collection.

10. Inventories
Inventories at cost consist of:
Note
7, 18

Coal
Materials and supplies
Fuel oil
Other consumables

18

2015
P1,079,086
109,820
67,599
6,713
P1,263,218

2014
P1,179,585
86,242
93,402
5,804
P1,365,033

There were no inventory write-downs to net realizable value for the years ended
December 31, 2015 and 2014. Inventories charged to cost of power sold amounted to
P10,376,590, P11,945,280 and P11,179,322 in 2015, 2014 and 2013, respectively.

F-56

11. Prepaid Expenses and Other Current Assets


Prepaid expenses and other current assets consist of:
Note
Input VAT
Prepaid tax
Prepaid rent and others

7, 18

2015
P10,960,202
2,253,885
1,854,660
P15,068,747

2014
P7,389,026
1,296,666
451,510
P9,137,202

Input VAT consists of current and deferred input VAT on purchases of goods and
services which can be offset against the output VAT payable (Note 16).
Prepaid tax consists of creditable withholding taxes and excess tax credits of the Group
which can be used as a deduction against future income tax payable.
Prepaid rent and others pertain to the following:
a. Prepaid rent of the Group from various operating lease agreements amounted to
P61,961 and P12,173 as of December 31, 2015 and 2014, respectively (Note 7).
b. PSALM monthly fee outage credits from the approved reduction in future monthly
fees payable to PSALM resulting from the outages of the Sual Power Plant in 2015.
c. Professional services related to project financing of SCPC (Note 28).

F-57

12. Property, Plant and Equipment


Property, plant and equipment consist of:

Building

Land and
Leasehold
Improvements

P221,760,866
5,027,966
226,788,832
226,788,832

P3,480,934
2,350,163
5,831,097
10,346
5,841,443

P346,602
46
346,648
2,649,691
2,996,339

P960,758
98,542
98,776
1,158,076
159,223
(754)
1,316,545

21,126,707
5,803,956
26,930,663
6,030,650
32,961,313

45,193
220,638
265,831
301,958
567,789

9,750
36,481
46,231
44,848
91,079

51,531
110,171
161,702
135,629
(691)
296,640

Carrying Amount
December 31, 2014

P199,858,169

P5,565,266

P300,417

P996,374

P21,413,097

P228,133,323

December 31, 2015

P193,827,519

P5,273,654

P2,905,260

P1,019,905

P52,426,658

P255,452,996

Power Plants
(Note 7)
Cost
January 1, 2014
Additions
Disposals
Reclassifications
December 31, 2014
Additions
Disposals
December 31, 2015
Accumulated Depreciation and
Amortization
January 1, 2014
Additions
December 31, 2014
Additions
Disposals
December 31, 2015

F-58

Other
Equipment

Capital
Projects in
Progress
P11,705,540
17,380,501
(82,420)
(7,590,524)
21,413,097
31,013,561
52,426,658

Total
P238,254,700
17,479,089
(82,420)
(113,619)
255,537,750
33,832,821
(754)
289,369,817

21,233,181
6,171,246
27,404,427
6,513,085
(691)
33,916,821

a. The combined carrying amounts of power plants under finance lease amounted to
P182,946,297 and P188,132,700 as of December 31, 2015 and 2014, respectively.
b. On September 23, 2013, SPI acquired from Petron a 2 x 35 MW Co-Generation Solid
Fuel-Fired Power Plant and all other pertinent machinery, equipment, facilities and
structures being constructed and installed which comprise the additional 2 x 35 MW
Co-Generation Solid Fuel-Fired Power Plant in Bataan, for a total consideration of
P16,800,000, inclusive of tax (Note 18). The power plant is used as collateral in
securing a loan obtained by SPI from syndicated banks (Note 17).
c. Additions to building, land and leasehold improvements and other equipment include
acquisition of assets of OHC and GPII for the Groups power plant expansion
projects (Note 13).
d. Other equipment includes machinery and equipment, transportation equipment,
mining equipment, office equipment and furniture and fixtures.
e. Capital projects in progress pertains to the following:
i.

Project of SMCPC for the construction of 2 x 150 MW Coal-Fired Power Plant


in Malita, Davao.

ii. Projects of SCPC and LPPC for the construction of the 2 x 150 MW Coal-Fired
Power Plants each in Limay, Bataan.
iii. Construction of limestone pulverizing plant and petcoke handling facility of SPI.
iv. Plant optimization and pumped-storage hydropower projects of SPDC.
v. SMEC, as IPP Administrator, and TSC, as IPP and operator of the Sual Power
Plant, intend to improve the coal receiving and unloading capability of the Sual
Power Plant as well as increase the coal shipment deliveries thereto (Note 7).
On September 9, 2014, SMEC agreed to provide an additional coal unloader
(the Third Unloader) to the Sual Power Plant while TSC agreed to install, operate
and maintain the same during the life of the Sual IPPA Agreement or until 2024.
Considering, however, that TSC is not allowed to accept and install any
equipment in the Sual Power Plant that it does not own, SMEC agreed to donate
the same in order to implement the intention of both parties to improve the
unloading capability and increase coal shipment deliveries. The Third Unloader
will be part of the assets to be turned over to SMEC at the end of the Sual IPPA
Agreement or until 2024 and is recognized as part of Donations under
Operating expenses account in the consolidated statements of income
(Note 21).
vi. Computer and system installations, and upgrades and implementation of
accounting system recognized as part of capital projects in progress were
reclassified to Intangible assets and goodwill account in the consolidated
statements of financial position in 2014 (Note 14).

F-59

Depreciation and amortization are recognized in profit or loss as follows:


Note
Cost of power sold
Operating expenses

21

2015
P6,445,102
73,415
P6,518,517

2014
P6,129,256
43,774
P6,173,030

2013
P5,382,435
21,749
P5,404,184

Total depreciation and amortization recognized in profit or loss include annual


amortization of capitalized interest amounting to P13,360, P4,453 and nil in 2015, 2014
and 2013, respectively.
The Group has interest amounting to P105,549, P254,539 and P84,367 which were
capitalized in 2015, 2014 and 2013, respectively. The capitalization rates used to
determine the amount of interest eligible for capitalization range from 6.0606% to
6.2921% and 6.0606% to 6.5446% in 2015 and 2014, respectively. The unamortized
capitalized borrowing costs amounted to P446,789 and P349,498 as of December 31,
2015 and 2014, respectively.

13. Investments and Advances


Investments and advances consist of:

Cost
Balance at beginning of year
Additions
Adjustment to subscription payable
Balance at end of year
Accumulated Equity in Net Losses
Balance at beginning of year
Equity in net losses during the year
Adjustment to equity in net earnings
(losses) in prior year
Balance at end of year
Advances

2015

2014

P2,074,051
1
2,074,052

P301,208
1,830,054
(57,211)
2,074,051

(63,719)
(526,463)

(41,374)
(32,231)

(1,982)
(592,164)

9,886
(63,719)

1,481,888
9,131,049
P10,612,937

2,010,332
8,601,945
P10,612,277

The Groups investments pertain to the following:


a. Olongapo Electricity Distribution Company, Inc. (OEDC)
In April 2013, SPGC and San Miguel Equity Investments, Inc. (SMEII), an entity
under common control, entered into a Deed of Assignment of Subscription Rights
whereby SMEII agreed to assign 35% ownership interest in OEDC to SPGC for a
consideration of P8,750.
As of December 31, 2015 and 2014, carrying amount of investment in OEDC
amounted to P192,012 and P191,550, respectively. Subscription payable amounted to
P28,101 as of December 31, 2015 and 2014 (Note 16).

F-60

The table below summarizes the financial information of investment in shares of


stock of an associate which is accounted for using the equity method:

Country of Incorporation
Current assets
Noncurrent assets
Current liabilities
Noncurrent liability
Net assets

2015
(Unaudited)
Philippines
P421,640
1,098,207
(655,189)
(353,812)
P510,846

2014
(Audited)
Philippines
P390,447
1,024,781
(899,921)
(9,884)
P505,423

Revenue

P1,298,687

P1,234,670

Net income (losses)/total comprehensive


income (losses)

P7,748

(P66,309)

Share in net income (losses)/total


comprehensive income (losses)

P2,712

(P23,208)

b. Angat Hydropower Corporation (Angat Hydro) and KWPP Holdings Corporation


(KWPP)
In accordance with the agreement of the Parent Company, through PVEI, and Korea
Water Resources Corporation (K-Water) to enter into a joint venture partnership for
the acquisition, rehabilitation, operation and maintenance of the 218 MW Angat
Hydroelectric Power Plant (Angat Power Plant) awarded by PSALM to K-Water,
PVEI deposited US$26,448 to an escrow account.
On November 18, 2014, PVEI acquired from the individual stockholders and
K-Water, 2,817,270 shares or 60% of the outstanding capital stock of Angat Hydro
and from the individual stockholders, 75 shares representing 60% of KWPP
outstanding capital stock. Accordingly, PVEI paid K-Water and the individual
stockholders a total of US$39,236 and P15 as full payment of the share purchase
price of Angat Hydro and KWPP shares, respectively. The payment was funded in
part by the deposit in escrow.
In accordance with the entry of PVEI into Angat Hydro and KWPP, K-Water and
PVEI are jointly in control of the management and operation of Angat Hydro and
KWPP.
Further, PVEI agreed to pay K-Water a support fee amounting to 3.0% of the total
amount of the bridge loan facility which was obtained for the acquisition by Angat
Hydro of the Angat Power Plant. This was subsequently reduced to 1.5% of the total
amount of the bridge loan facility effective August 4, 2015.
Angat Hydro
Angat Hydro was incorporated on November 15, 2013 and was created to engage in
the operations and maintenance of the Angat Power Plant and to supply power
generated to power corporations and to electric utilities, to import hydro-electric
facilities and equipment, and to do all acts necessary and incidental thereto, in
accordance with RA No. 9136 or otherwise known as the Electric Power Industry
Reform Act of 2001 (EPIRA).

F-61

KWPP
KWPP was incorporated on November 27, 2013 and was established for the purpose
of acquiring, holding or leasing water and flowage rights.
Details of investments in Angat Hydro and KWPP are as follows:
December 31, 2015
Cost
Balance at beginning of year
Additions
Balance at end of year
Accumulated Equity in Net Losses
Balance at beginning of year
Equity in net losses during the year
Adjustment to equity in net losses
prior period
Balance at end of year

Angat Hydro

KWPP

P1,830,039
1
1,830,040

P15
15

(11,257)
(529,174)

(15)
-

267
(540,164)

(15)

P1,289,876
December 31, 2014
Acquisition cost
Equity in net losses during the year

Angat Hydro
P1,830,039
(11,257)
P1,818,782

P KWPP
P15
(15)
P -

Unrecognized share in net losses in excess of the Groups interest in KWPP


amounted to P171 and nil on December 31, 2015 and 2014, respectively.
The table below summarizes the financial information of investments in shares of
stock of joint ventures which is accounted for using the equity method:
December 31, 2015 (Unaudited)
Angat Hydro
Philippines
P1,143,612
19,716,594
(20,861,349)
(17,693)
(P18,836)

Country of Incorporation
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Net liabilities
Revenue

P1,248,800

KWPP
Philippines
P2,049
19,651
(4,957)
(17,583)
(P840)
P -

Net losses/total comprehensive losses

(P881,957)

(P285)

Share in net losses/total comprehensive losses

(P529,174)

(P171)

F-62

December 31, 2014 (Audited)


Angat Hydro
Philippines
P407,488
20,187,319
(19,713,866)
(17,819)
P863,122

Country of Incorporation
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Net assets (liabilities)

KWPP
Philippines
P76
17,783
(630)
(17,783)
(P554)

Revenue

P153,772

P -

Net losses/total comprehensive losses

(P72,591)

(P470)

Share in net losses/total comprehensive losses*

(P10,990)

(P15)

*44 day share in net losses/total comprehensive losses for the period from November 18 to December 31, 2014 of
Angat Hydro and KWPP.

c. Acquisition of OHC and GPII


On February 10, 2015, the Parent Company acquired 100% outstanding capital stock
of OHC for a total consideration amount of P588,050, inclusive of transaction costs.
OHC is engaged in the business of acquiring by purchase, lease, donation or
otherwise, and to own, use, improve, develop, subdivide, sell, mortgage, exchange,
lease, develop and hold for investment or otherwise, real estate of all kinds; to
improve, manage or otherwise deal with or dispose of buildings, houses, apartments,
and other structures of whatever kind, together with their appurtenances; and to carry
on, provide support and manage the general business of any corporation, entity or
joint venture.
On September 4, 2015, the Parent Company acquired 100% outstanding capital stock
of GPII for a total consideration amount of P1,820,972, inclusive of transaction costs.
GPIIs primary purpose is to carry on and engage in the business of developing and
converting the properties in Limay, Bataan into a multi-use industrial park with all
the necessary amenities, in joint venture with any person or entity.
The following summarizes the recognized fair value of net assets acquired from OHC
and GPII at the acquisition date:
OHC
P37,609
550,441
P588,050

Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Net assets

GPII
P126,317
2,071,882
(5,940)
(371,287)
P1,820,972

In accordance with criteria set out in paragraph 2 of PFRS 3 and based on PIC
Question and Answer No. 2011 - 06 PFRS 3 (2008), and PAS 40, Investment
Property - Acquisition of Investment Properties - Asset Acquisition or Business
Combination, the Parent Company is exempt from applying acquisition method and
should be accounted for as an asset acquisition based on the principles described in
other PFRS. The acquired set of assets and activities does not constitute a business as
defined in PFRS 3.

F-63

d. Meralco
In 2012, investment in an associate consists of 69,059,538 quoted common stock of
Meralco, representing 6.13% ownership interest. The Parent Company has
determined that it has obtained significant influence over the financial and operating
policies of Meralco in conjunction with SMC and subsidiaries ownership of 32.04%
interest in Meralco. Accordingly, the Parent Company applied the equity method of
accounting on its investment in shares of stock of Meralco. The equity share in the
net earnings of Meralco in 2013 amounted to P836,377.
The Parent Company received cash dividends amounting to P704,407 in 2013.
On September 30, 2013, the Parent Company, together with SMC and San Miguel
Pure Foods Company, Inc., entered into a Share Purchase Agreement with
J.G. Summit, for the sale of the Parent Companys 69,059,538 shares of stock of
Meralco for P16,228,991. The sale is subject to the satisfaction of certain closing
conditions, which were satisfied by all the parties on December 11, 2013. As a result
of the sale, the Group recognized a gain of P2,587,044, net of expenses, included as
part of Gain on sale of investment account in the 2013 consolidated statement of
income (Note 9).
Advances pertain to deposits made for future investment in land holding companies and
power-related expansion projects.

14. Intangible Assets and Goodwill


Intangible assets and goodwill consist of:
Note
6
7

Mining rights
Power concession assets - net
Computer software
Goodwill

2015
P1,719,726
507,497
177,160
8,866
P2,413,249

2014
P1,719,726
481,702
111,947
8,866
P2,322,241

Goodwill is attributed to the Groups acquisition of SMEC and SPDC in 2010. Based on
managements assessment, goodwill is not impaired since the recoverable amount of the
related net assets of SMEC and SPDC for which the goodwill was attributed still exceeds
its carrying amount as of December 31, 2015 and 2014.

15. Other Noncurrent Assets


Other noncurrent assets consist of:
Note
26, 27

Restricted cash
Deferred input VAT - net of current portion
Noncurrent receivable
18, 26, 27
Advances to suppliers

F-64

2015
P1,311,740
682,674
253,812
P2,248,226

2014
P1,054,801
980,057
179,129
1,428
P2,215,415

Restricted cash represents: (a) SPIs Cash Flow Waterfall accounts (Trust Fund) with a
local bank, as part of the provisions in SPIs Facility Agreement, amounting to
P1,208,870 and P1,021,163 as of December 31, 2015 and 2014, respectively (Note 17);
and (b) APECs collected contributions from consumers, membership fees and bill
deposits amounting to P102,870 and P33,638 as of December 31, 2015 and 2014,
respectively (Note 7).
The deferred input VAT mainly pertains to the input VAT on the purchase of power plant
from Petron (Note 17).
Noncurrent receivable pertains to loan granted by SPGC to OEDC which is payable in
equal monthly payments of principal and interest at 4.7252% commencing on
January 1, 2017 and thereafter on the first day of each month until December 2024
(Note 18). In 2014, this represents receivable from a third party for the sale of the Parent
Companys 100% ownership interest in Panasia Energy, Inc., net of current portion. As
of December 31, 2015, the entire receivable was classified as current assets and presented
as Other receivables under the Trade and other receivables account in the
consolidated statements of financial position.

16. Accounts Payable and Accrued Expenses


Accounts payable and accrued expenses consist of:
Note
Non-trade
Trade
Output VAT
Accrued interest
Withholding taxes
Subscription payable

7, 18
7, 17
13
26, 27

2015
P15,115,167
12,903,186
4,057,706
493,897
242,993
28,101
P32,841,050

2014
P10,189,569
12,621,078
4,623,037
487,997
151,330
28,101
P28,101,112

Trade payables consist of payable related to energy fees, inventories and power
purchases. These are generally on a 30-day term and are non-interest bearing.
Output VAT consists of current and deferred output VAT payable. Deferred output VAT
represents the VAT on sale of power which will be remitted to the Government only
upon collection from the customers (Note 9).
Non-trade payables include liability relating to power rate adjustments, payables to
contractors and other payables to the Government except output VAT and withholding
taxes. Power rate adjustments include the adjustments in November and December 2013
sale of power to WESM amounting to P563,587 and P1,352,610 as of December 31,
2015 and 2014, respectively. The noncurrent portion is presented as Other noncurrent
liabilities account in the consolidated statements of financial position in 2014 (Note 28).

F-65

17. Long-term Debt


Long-term debt consists of:
Note
Bonds payable
Less debt issue costs
Loans payable
Less debt issue costs
26, 27
Less current maturities

2015
P14,118,000
4,512
14,113,488

2014
P13,416,000
61,955
13,354,045

45,175,700
681,327
44,494,373

35,966,800
607,600
35,359,200

58,607,861
15,647,244
P42,960,617

48,713,245
1,330,037
P47,383,208

a. Bonds Payable
On January 28, 2011, the Parent Company carried out a US$300,000, 7%, 5-year
note (Bonds Payable) issued under Regulations of the U.S. Securities Act of 1933, as
amended. The unsecured bond issue is listed in the Singapore Exchange Securities
Trading Limited. The terms and conditions of the bonds contain a negative pledge
provision with certain limitations on the ability of Parent Company and its material
subsidiaries to create or have outstanding any security interest upon, or with respect
to, any of the present or future business, undertaking, assets or revenue (including
any uncalled capital) of the Parent Company or any of its material subsidiaries to
secure any indebtedness, subject to certain exceptions. Upon the occurrence of a
change of control, each bondholder has the right, at its option, to require the Parent
Company to repurchase all (but not some only) of its bonds, at a redemption price
equal to 101% of the principal amount thereof plus accrued interest on the change of
control put date.
The Parent Company has agreed to observe certain covenants, including, among
other things, maintaining a leverage ratio, limitation on guarantees and loans,
limitation on indebtedness, limitation on restricted payments, limitation on dividends
and other restrictions affecting material subsidiaries, limitation on transactions with
shareholders and affiliates, limitation of asset sales, consolidation, merger and sales
of assets and certain other covenants. Interest is payable semi-annually in arrears on
January 28 and July 28 of each year, with first interest payment on July 28, 2011.
Bonds payable amounted to P14,118,000 and P13,416,000 while accrued interest
amounted to P411,775 and P391,300 as of December 31, 2015 and 2014,
respectively. Interest expense amounted to P1,147,860, P1,123,679 and P1,094,846
in 2015, 2014 and 2013, respectively.
On December 5, 2013, the BOD was informed of the need to amend certain
provisions of the Bonds Payable, including but not limited to, the definitions of
Asset Sale, Material Subsidiary, Non-Recourse Project Level Indebtedness,
Permitted Security Interest and Project Subsidiaries and the leverage and
cross-default thresholds in order to align the provisions of the Bonds Payable with
the US$700,000 Loan Facility of the Parent Company, thereby providing flexibility
to enable the Parent Company to divest its non-core assets and raise funds in line
with its long term growth strategy.

F-66

Bonds payable with maturity of January 28, 2016 was paid on January 26, 2016
using the US$300,000 short-term loan proceeds obtained in 2016 (Note 28).
b. Loans Payable
Parent Company
i) On March 31, 2011, the Parent Company signed a US$200,000, 3-year term loan
with a syndicate of banks. The US$200,000 loan was drawn down by the Parent
Company on September 30, 2011. Pursuant to the Facility Agreement, the
amount of the loan drawn down will bear interest at the rate of the London
interbank offered rate (LIBOR) plus a margin, payable in arrears on the last day
of the agreed interest period.
The Parent Company may, by giving not less than ten (10) business days prior
written notice to the Facility Agent, prepay the loan in whole or in part with
accrued interest on the amount prepaid and subject to Break Funding Cost where
the prepayment is made on a day other than the last day of an interest period,
without minimum penalty.
On September 30, 2013, the Parent Company pre-terminated the US$200,000,
3-year loan maturing in September 2014.
ii) On September 9, 2013, the Parent Company signed a US$650,000, 5-year term
loan with a syndicate of banks. The amount of the loan will bear interest at the
rate of the LIBOR plus a margin, payable in arrears on the last day of the agreed
interest period. Subsequently, on November 15, 2013, the US$650,000 Facility
Agreement was amended extending the loan facility from US$650,000 to
US$700,000.
The Facility Agreement imposes a number of covenants on the part of the Parent
Company including, but not limited to, maintaining a leverage ratio throughout
the duration of the term of the Facility Agreement. The terms and conditions of
the Facility Agreement contains a negative pledge provision with certain
limitations on the ability of the Parent Company and its material subsidiaries to
create or have outstanding any security interest upon or with respect to, any of
the present or future business, undertaking, assets or revenue (including any
uncalled capital) of the Parent Company or any of its material subsidiaries to
secure any indebtedness, subject to certain exceptions.
In March 2015, the remaining US$200,000 was drawn by the Parent Company
from the US$700,000, 5-year term loan, which will mature in September 2018.
The drawn amount from the Facility Agreement amounted to US$700,000 and
US$500,000 as of December 31, 2015 and 2014, respectively.
SPI
On September 27, 2013, SPI has entered into a P13,800,000, 10-year term loan with
a syndicate of banks, for the acquisition of a 2 x 35 MW Co-Generation Solid
Fuel-Fired Power Plant and all other pertinent machinery, equipment, facilities and
structures for the expansion of the capacity. Of this amount, P12,300,000 and
P1,500,000 were drawn on September 30, 2013 and 2014, respectively. The loan
includes amount payable to a related party amounting to P3,102,750 and P3,451,000
as of December 31, 2015 and 2014, respectively.

F-67

Effective interest rate ranges from 6.0606% to 6.2921% and 6.0606% to 6.5446% in
2015 and 2014, respectively. The Facility Agreement has a final maturity date of
September 2023.
SPI may, by giving not less than 30 days prior written notice to the Facility Agent,
prepay the loan in whole or in part with accrued interest on the amount prepaid and
subject to a repayment penalty of 1% of the principal amount being paid to be
applied against the outstanding amounts due in the inverse order of maturity. The
repayment schedule consists of 40 periods on a quarterly basis. The first repayment
of principal started in December 2014.
The annual maturities on this loan are as follows:
Year
2016
2017
2018
2019
2020
2021 and thereafter

Gross Amount
P1,573,200
1,573,200
1,573,200
1,573,200
1,573,200
4,367,700
P12,233,700

Debt Issue Costs


P39,444
35,107
30,581
25,733
20,606
26,601
P178,072

Net
P1,533,756
1,538,093
1,542,619
1,547,467
1,552,594
4,341,099
P12,055,628

The Facility Agreement imposes a number of covenants on the part of SPI, including,
but not limited to, maintaining a debt-to-equity ratio and a specified debt service
coverage ratio throughout the duration specified under the Facility Agreement. The
terms and conditions of the Facility Agreement contains certain limitations on the
ability of SPI to declare or pay any dividend, distribution or other return of capital in
respect of any ownership interest to SPI and any other payment to the Parent
Company or its affiliates, subject to certain exceptions.
The loan is secured by the mortgage over the power plant and pledge of shares in SPI
owned by the Parent Company (Note 12).
Loans payable amounted to P45,175,700 and P35,966,800 while accrued interest
amounted to P7,544 and P17,794 as of December 31, 2015 and 2014, respectively. Total
interest expense and financing charges on loans payable amounted to P1,756,754,
P1,475,532 and P527,527 (inclusive of P111,147, P266,655 and P87,462 capitalized in
construction in progress in 2015, 2014 and 2013, respectively; Note 12) in 2015, 2014
and 2013, respectively.
The amortization of debt issue costs of P262,428, P173,978 and P89,912 is included as
part of Interest expense and other financing charges account in the consolidated
statements of income in 2015, 2014 and 2013, respectively.
As of December 31, 2015 and 2014, the Group is in compliance with the covenants of the
debt agreements.

F-68

The movements in debt issue costs are as follow:


2015
P669,555
284,310
(262,428)
(5,598)
P685,839

Balance at beginning of year


Additions
Amortization
Capitalized amount
Balance at end of year

2014
P727,115
128,535
(173,978)
(12,117)
P669,555

Contractual terms of the Groups interest bearing loans and borrowings and exposure to
interest rate, foreign currency and liquidity risks are discussed in Note 26.

18. Related Party Disclosures


The Group, in the normal course of business, purchases products and services from and
sells products and renders services to related parties. Transactions with related parties are
made at normal market prices and terms. An assessment is undertaken at each financial
year by examining the financial position of the related party and the market in which the
related party operates.
The following are the transactions with related parties and the outstanding balances:

Note

Year

Revenues
from
Related
Parties

21

2015
2014
2013

P -

P1,177,187
267,336
412,372

P252
10,557
252

P106,573 On demand or Unsecured;


18,009 30 days;
no impairment
140,143 non-interest
bearing

Entities
7, 9, 10 12, 21
Under
Common
Control

2015
2014
2013

8,817,828
7,814,823
1,831,882

2,835,155
2,208,319
17,993,545

1,461,602
852,839
522,697

358,842 On demand or Unsecured;


418,116 30 days;
no impairment
524,268 non-interest
bearing

Associate

2015
2014
2013

958,043
878,650
167,550

SMC

Associates of
Entities
Under
Common
Control

Others

15

2015
2014
2013

7, 10

2015
2014
2013

17

735,355
-

Purchases
from
Related
Parties

Amounts
Owed by
Related
Parties

Amounts
Owed to
Related
Parties

28,101 30 days;
28,101 non-interest
bearing

92,621
77,816
81,546

256,472
-

78,952
-

118,896
-

Conditions

Unsecured;
no impairment

8 years;
interest
bearing

Unsecured;
no impairment

6 30 days;
non-interest
bearing

Unsecured;
no impairment

3,102,750 10 years;
3,451,000 interest
3,119,565 bearing

2015
2014
2013

2015
2014
2013

7,419
-

321,143
-

1,677
-

2015

P10,518,645

P4,452,381

P1,891,576

P3,756,650

2014

P8,693,473

P2,475,655

P941,212

P3,915,226

2013

P1,999,432

P18,405,917

P604,495

P3,783,976

F-69

Terms

Secured

160,378 On demand or Unsecured;


30 days;
no impairment
non-interest
bearing

a. Amounts owed by related parties consist of trade and other receivables and security
deposits (Note 7).
b. Amounts owed to related parties consist of trade and non-trade payables,
management fees, purchases of fuel, reimbursement of expenses, rent, insurance and
services rendered by related parties.
c. Amounts owed by an associate consists of interest bearing loan granted to OEDC
included as part of Other noncurrent assets - net account in the consolidated
statements of financial position.
d. The amount owed to associate of an entity under common control consists of interest
bearing loan obtained from Bank of Commerce included as part of Long-term debt
account in the consolidated statements of financial position.
e. The compensation of key management personnel of the Group amounted to P37,509,
P32,604 and P30,702 for the years ended December 31, 2015, 2014 and 2013,
respectively.
f.

SMC offers shares of stock to employees of SMC and its subsidiaries under the
ESPP. Under the ESPP, all permanent Philippine-based employees of SMC and its
subsidiaries who have been employed for a continuous period of one year prior to the
subscription period will be allowed to subscribe at a price equal to weighted average
daily closing prices for three months prior to the offer period less 15% discount.
A participating employee may acquire at least 100 shares of stock up to a maximum
of 20,000 shares, subject to certain conditions, through payroll deductions (Note 3).
The ESPP requires the subscribed shares and stock dividends accruing thereto to be
pledged to SMC until the subscription is fully-paid. The right to subscribe under the
ESPP cannot be assigned or transferred. A participant may sell his shares after the
second year from exercise date. The ESPP also allows subsequent withdrawal and
cancellation of participants subscriptions under certain terms and conditions.
In 2015, 2014 and 2013, there are no expenses related to ESPP.

19. Retirement Plan


The Parent Company and SMEC have unfunded, noncontributory, defined benefit plan
covering all of its eligible employees. Retirement benefits expense pertains to accrual of
expected retirement benefits of active employees in accordance with RA No. 7641,
The Philippine Retirement Law. Retirement benefit expense and liability is determined
using the projected unit credit method. The Groups latest actuarial valuation date is
December 31, 2015. Valuations are obtained on a periodic basis.

F-70

The following table shows reconciliation from the opening balances to the closing
balances of defined benefit obligation and its components.

Balance at January 1

2015
P16,692

2014
P7,714

5,866
745
6,611

8,573
405
8,978

22,354
P45,657

P16,692

Included in Profit or Loss


Current service cost
Interest cost
Included in Other Comprehensive Income
Actuarial losses arising from experience adjustments
Balance at December 31

Defined benefit obligation included as part of Other noncurrent liabilities account in


the consolidated statements of financial position amounted to P45,657 and P16,692 as of
December 31, 2015 and 2014, respectively.
The retirement benefit expense amounting to P6,611, P8,978 and P7,714 in 2015, 2014
and 2013, respectively, are recognized as part of Salaries, wages and benefits under
Operating expenses account in the consolidated statements of income (Note 21).
The reserve for retirement plan as of December 31, 2015 comprises of actuarial loss
recognized in other comprehensive income during the year amounting to P22,354.
The following were the principal actuarial assumptions at the reporting date:
2015
4.43% - 4.89%
7.00%

Discount rate
Future salary increase

2014
4.12% - 4.49%
-

Assumptions regarding future mortality have been based on published statistics and
mortality tables. Mortality rate is based from the 2001 CSO Table - Generational
(Scale AA, Society of Actuaries).
The weighted average duration of the defined benefit obligation as of December 31, 2015
is 8.9 to 9.2 years.
Details of the expected future benefit payments are as follows:
Financial Year
2016
2017
2018
2019
2020
2021 - 2025

F-71

Amount
P 4,639
3,889
4,899
3,542
17,156

Sensitivity Analysis
Reasonably possible changes at the reporting date to one of the relevant actuarial
assumptions, holding other assumptions constant, would have affected the defined benefit
obligation by the rates shown below:
100 bps Increase 100 bps Decrease
(6.6% - 7.4%)
7.3% - 8.1%
6.5% - 7.1%
(6.0% - 6.7%)
1.9% - 19.5%

Discount rate
Salary increase rate
No attrition rates

Risks and Management of Risks


The defined benefit obligation expose the Group to actuarial risks, such as longevity risk,
interest rate risk, and market (investment) risk.
The defined benefit obligation is calculated using a discount rate set with reference to
government bond yields as such is exposed to market factors including inflation. Higher
inflation will lead to higher liability. Also, the defined benefit obligations are to provide
benefits for the life of members, so increase in life expectancy will result in an increase
in the plans liability. These risks are managed with the objective of reducing the impact
of these risks to the cash flows of the Group.
The Group does not have a formal retirement plan and therefore has no plan assets to
match against the liability under the defined benefit obligation. Also, benefit claims
under the defined benefit obligation are paid directly by the Group when they become
due.

20. Equity
Capital Stock
As of December 31, 2015 and 2014, the Parent Companys authorized capital stock is
P2,000,000, divided into 2,000,000,000 common shares with par value of P1 per share.
Capital stock consists of:
2015
P1,250,004
187,500
P1,062,504

Subscribed capital stock


Less subscription receivable

2014
P1,250,004
187,500
P1,062,504

The number of shares subscribed is 1,250,003,500 common shares as of


December 31, 2015 and 2014.

F-72

Reserves

Excess of net assets over


purchase price of acquired
subsidiaries under common
control
Share in other comprehensive
loss of an associate - net
Balance at beginning of year
Additions
Disposal
Balance at end of year

2015

2014

2013

P785,279

P785,279

P785,279

P785,279

(39,306)
20,535
18,771
-

P785,279

P785,279

Excess of net assets over purchase price of acquired subsidiaries under common control
pertains to the acquisitions of noncontrolling interest in SMEC and SPDC.
The share in other comprehensive loss of an associate consists of unrealized fair value
gain on AFS financial assets and cumulative translation adjustments.
Retained Earnings
The Groups unappropriated retained earnings include the accumulated earnings in
subsidiaries and equity in net earnings (losses) of associates and joint ventures not
available for declaration as dividends until declared by the respective investees.
The Parent Companys BOD declared cash dividends as follows:
December 31, 2015
Date of
Declaration

Stockholders of
Record

Date Payable

Dividend
Per Share

Amount

March 25, 2015


July 2, 2015
November 5, 2015

March 25, 2015


July 2, 2015
November 5, 2015

March 31, 2015


July 9, 2015
November 10, 2015

P1.20
1.20
1.20

P1,500,000
1,500,000
1,500,000
P4,500,000

December 31, 2014


Date of Declaration

Stockholders of
Record

Date Payable

Dividend
Per Share

Amount

March 25, 2014


June 3, 2014
August 19, 2014
November 4, 2014

March 25, 2014


June 3, 2014
August 19, 2014
November 4, 2014

April 8, 2014
June 10, 2014
August 29, 2014
November 11, 2014

P1.20
2.80
2.00
2.00

P1,500,000
3,500,000
2,500,000
2,500,000
P10,000,000

F-73

December 31, 2013


Date of Declaration

Stockholders of
Record

Date Payable

Dividend
Per Share

Amount

February 19, 2013


May 3, 2013
August 13, 2013
November 29, 2013

February 19, 2013


May 3, 2013
August 13, 2013
November 29, 2013

February 28, 2013


May 15, 2013
August 15, 2013
December 5, 2013

P0.80
0.80
0.80
1.20

P1,000,000
1,000,000
1,000,000
1,500,000
P4,500,000

The Groups appropriated retained earnings, net of reversal, are as follows:


2015
P7,700,000
5,340,000
9,158,600
2,957,000
P25,155,600

Parent Company
SMEC
SPPC
SPDC

2014
P11,771,000
7,675,000
7,352,300
2,604,600
P29,402,900

2013
P2,643,000
1,800,000
2,981,800
P7,424,800

The analysis of appropriated retained earnings as of December 31, 2015 is as follows:


Parent
Company
SMEC
P2,643,000 P1,800,000
-

SPPC
P2,981,800
-

SPDC
P -

1,800,000
(500,000)
6,375,000

2,981,800
4,370,500

2,604,600

7,424,800
(500,000)
22,478,100

December 31, 2014


Used/utilized
Additions

11,771,000 7,675,000
(11,771,000) (7,325,000)
7,700,000 4,990,000

7,352,300
1,806,300

2,604,600
352,400

29,402,900
(19,096,000)
14,848,700

December 31, 2015

P7,700,000 P5,340,000

January 1, 2013
Used/utilized
Additions
December 31, 2013
Used/utilized
Additions

2,643,000
9,128,000

P9,158,600 P2,957,000

Total
P7,424,800
-

P25,155,600

On December 27, 2012, the Parent Company appropriated: a) P2,092,750 for the
construction of a power plant; and b) P446,250 for the payment of interest on the bonds
payable; and c) P104,000 for the payment of interest on the loans payable (Note 17),
SPPC appropriated P232,800 for the payment of fees due to PSALM under its IPPA
Agreement for the Ilijan Power Plant, and SMEC appropriated: a) P1,238,000 for mining
project development costs, b) P500,000 for the upgrading of the Sual power plants coal
unloading facility, and c) P62,000 for the purchase of computer software. These projects
were approved by the BOD on the same date, and are expected to commence in 2013. As
of December 31, 2013, the projects to which these appropriations relate are still on-going
and are expected to be completed in 2-3 years.
On December 22, 2014, the BOD approved the appropriation of retained earnings for
fixed monthly payments to PSALM of SMEC, SPPC and SPDC pursuant to the IPPA
Agreements and additional funding requirements on its expansion project.

F-74

On December 23, 2015, the BOD approved the appropriation of retained earnings
amounting to P4,990,000, P1,806,300 and P352,400 for fixed monthly payments to
PSALM of SMEC, SPPC and SPDC, respectively, pursuant to the IPPA Agreements. On
the same day, the BOD approved the appropriation of retained earnings of the Parent
Company amounting to P7,700,000 for the payment of the US$700,000, 5-year term loan
to mature in September 2018 (Note 17).
The appropriations reversed in 2015 and 2014 were used for the Groups required capital
expenditures and servicing of long-term debt as intended.
Undated Subordinated Capital Securities (USCS)
The Parent Company issued and listed on the Singapore Stock Exchange the following
USCS at an issue price of 100%:
Date of
Issuance

Distribution
Payment Date

August 26, 2015

August 26 and
February 26
of each year
May 7 and
November 7
of each year

May 7, 2014

Initial
Rate of
Distribution

Amount in
Philippine
Peso

Step-Up Date

Amount of
USCS Issued

6.75%
per annum

February 26, 2021

US$300,000

P13,823,499

7.5%
per annum

November 7, 2019

300,000

13,110,066

US$600,000

P26,933,565

The holders of the USCS have conferred a right to receive distributions on a semi-annual
basis from their issuance dates at the initial rate of distribution, subject to the step-up
rate. The Parent Company has a right to defer this distribution under certain conditions.
The USCS have no fixed redemption date and are redeemable in whole, but not in part, at
the Parent Companys option on step-up date, or any distribution payment date thereafter
or upon the occurrence of certain other events at the principal amounts of the USCS plus
any accrued, unpaid or deferred distribution.
The proceeds were used by the Parent Company to finance investments in power-related
assets and other general corporate purposes.
Details of distributions paid to USCS holders are as follows:
Year
2015

Date of Last Payment


May 6
November 6

2014

November 6

Amount Paid
P714,616
736,072
P1,450,688
P723,214

On February 24, 2016, the Parent Company paid distributions to USCS holders
amounting to P689,223.

F-75

21. Plant Operations and Maintenance Fees and Operating Expenses


Plant operations and maintenance consist of:
Note
7, 18

Plant operations and maintenance fees


Supplies and metering
Salaries, wages and employee
benefits
Others

2015

2014

2013

P467,444
21,314

P499,850
22,510

P194,388
-

13,330
123

41,720
11,552

P502,211

P575,632

P194,388

2015

2014

2013

P1,196,789
946,801
723,269
360,091
243,045
219,681
190,523

P456,727
406,979
143,492
115,849
127,116
233,701
149,106

P409,373
110,791
35,448
24,167
106,772
246,591
121,784

142,658
138,067
124,221
105,617
83,531
73,415
59,781
296,646

144,393
65,952
130,019
46,451
45,467
43,774
662,752
140,152

32,850
756
38,788
28,965
29,643
21,749
240,060
100,013

P4,904,135

P2,911,930

P1,547,750

Operating expenses consist of:

Management fees
Taxes and licenses
Outside services
Rent
Corporate special program
Market fees
Salaries, wages and benefits
Impairment losses on trade
receivables
Repairs and maintenance
Professional fees
Supplies
Travel and transportation
Depreciation and amortization
Donations
Miscellaneous

Note
18

4, 7, 18
7
18, 19
9

12
12

Donations represent contributions to registered donee institutions for their programs on


education, environment and disaster-related projects. Corporate special program pertains
to the Groups corporate social responsibility projects.

22. Other Income (Charges)


Other income (charges) - net consists of:

Foreign exchange losses - net


PSALM monthly fees reduction
Miscellaneous income (charges)

Note
26
7
4, 7, 9

2015

2014

2013

(P7,582,548)
1,858,506
(202,008)

(P813,621)
814,565
67,281

(P9,434,860)
872,243
71,555

(P5,926,050)

P68,225

(P8,491,062)

Miscellaneous income (charges) pertain to impairment losses on other receivables,


service fees from TPEC and sale of fly ash to a related party (Notes 9 and 18).

F-76

23. Income Taxes


The components of income tax expense are as follows:
Note
24

Current
Deferred

2015

2014

P2,181,771
521,637

P1,608,293
1,085,130

P686,311
(1,522,613)

2013

P2,703,408

P2,693,423

(P836,302)

Current income tax expense in 2015, 2014 and 2013 represents regular corporate income
tax of 30% on taxable income, MCIT on gross income and final tax paid on interest
income.
Deferred tax assets (liabilities) arise from the following:

Items recognized in profit or loss


Allowance for impairment losses on trade
and other receivables
Defined benefit obligation
Difference of depreciation and other
related expenses over monthly payments
Accrued expenses and others
Items recognized directly in other
comprehensive income
Fair value adjustment
Equity reserve for retirement plan

Note

2015

2014

9
19

P170,443
6,991

P60,005
-

(849,032)
(114,129)

(324,095)
-

13

(357,966)
6,706
(P1,136,987)

(P264,090)

The difference of depreciation and other related expenses over monthly payments
represents timing difference between tax and accounting recognition of expenses.
The amounts above are reported in the consolidated statements of financial position as
follows:
2015
P2,745,943
(3,882,930)
(P1,136,987)

Deferred tax assets


Deferred tax liabilities

2014
P2,779,380
(3,043,470)
(P264,090)

As of December 31, 2015, the NOLCO and MCIT of the Group that can be claimed as
deduction from future taxable income and deduction from corporate income tax due,
respectively, are as follows:

Year Incurred/Paid
Year 2015
Year 2014
Year 2013

Carryforward
Benefits Up To
December 31, 2018
December 31, 2017
December 31, 2016

F-77

NOLCO
P3,014,845
2,073,953
2,187,455
P7,276,253

MCIT
P38,415
14,230
12,766
P65,411

The reconciliation between the statutory income tax rate on income before income tax
and the Groups effective income tax rate is as follows:
2015

2014

2013

Statutory income tax rate


Increase (decrease) in the income tax rate
resulting from:
Unrecognized deferred tax assets
Availment of optional standard
deduction and others
Income subject to ITH

30.00%

30.00%

30.00%

30.43%

(0.78%)
-

(1.91%)
(7.87%)

20.22%
(76.30%)

Effective income tax rate

59.65%

20.22%

(26.08%)

24. Registrations and License


Registrations with the Board of Investments (BOI)
On August 21, 2007, SEPC was registered with the BOI under the Omnibus Investment
Code of 1987 (Executive Order No. 226), as New Domestic Producer of Coal on a
Non-pioneer Status and was entitled to certain incentives that include, among others, an
Income Tax Holiday (ITH) for four (4) years from June 2011 or date of actual start of
commercial operations, whichever is earlier, but in no case earlier than the date of
registration.
SMEC, SPDC and SPPC are registered with the BOI as administrator/operator of their
respective power plants on a pioneer status with non-pioneer incentives and were granted
ITH for 4 years without extension beginning August 1, 2010 up to July 31, 2014, subject
to compliance with certain requirements under their registrations. The ITH incentive
availed was limited only to the sale of power generated from the power plants.
In 2013, SMCPC and SCPC were granted incentives by the BOI on a pioneer status for 6
years subject to the representations and commitments set forth in the application for
registration, the provisions of Omnibus Investments Code of 1987, the rules and
regulations of the BOI and the terms and conditions prescribed. As of December 31,
2015, SMCPC and SCPC have pending requests with the BOI to move the start of
commercial operations. The ITH incentives shall be limited only to the revenues
generated from the sale of the electricity from the power plants.
On September 3, 2013 and January 28, 2014, the BOI issued a Certificate of Authority to
SMCPC and SCPC, respectively, subject to provisions and implementing rules and
regulations of Executive Order No. 70, entitled Reducing the Rates of Duty on Capital
Equipment, Spare Parts and Accessories imported by BOI Registered New and
Expanding Enterprises. Authority shall be valid for 1 year from the date of issuance. For
the subsequent years, BOI issued new Certificates of Authority dated March 6 and
September 4, 2014 and June 9 and August 26, 2015 to SMCPC and February 6, 2015 and
February 11, 2016 to SCPC, with a validity of 1 year from the date of issuance.
On March 4, 2014, the BOI approved the transfer of BOI Certificate of Registration
Nos. 2013-047 and 2010-181 bearing pioneer status with non-pioneer incentives from
Petron to SPI. Under the Certificates of Registration, SPI is entitled to certain incentives
including ITH incentives, as applicable, for the revenue generated from the sale of
electricity.

F-78

License Granted by the ERC


On August 22, 2011, SMELC was granted a Retail Electricity Suppliers (RES) License
by the ERC pursuant to Section 29 of the EPIRA which requires all suppliers of
electricity to the contestable market to secure a license from the ERC. The term of the
RES License is for a period of 5 years from the time it was granted and renewable
thereafter.

25. Basic and Diluted Earnings Per Share


Basic and diluted EPS is computed as follows:
2014

2015
Net income attributable to equity holders
of the Parent Company
Distributions to USCS holders for the year

P1,828,918
(1,918,382)

Net income (loss) attributable to common


shareholders of the Parent Company (a)

(89,464)

Weighted average number of common


shares outstanding (in thousands) (b)
Basic/diluted EPS (a/b)

P10,629,482
(962,786)

2013
P4,042,655
-

9,666,696

4,042,655

1,250,004

1,250,004

1,250,004

(P0.07)

P7.73

P3.23

As of December 31, 2015, 2014 and 2013, the Group has no dilutive debt or equity
instruments.

26. Financial Risk and Capital Management Objectives and Policies


Objectives and Policies
The Group has significant exposure to the following financial risks primarily from its use
of financial instruments:

Interest Rate Risk


Foreign Currency Risk
Liquidity Risk
Credit Risk

This note presents information about the exposure to each of the foregoing risks, the
objectives, policies and processes for measuring and managing these risks, and for
management of capital.
The principal non-trade related financial instruments of the Group include cash and cash
equivalents, other receivables (current and noncurrent), restricted cash, non-trade
payables, and long-term debt. These financial instruments are used mainly for working
capital management and investment purposes. The trade-related financial assets and
financial liabilities of the Group such as trade receivables, accounts payable and accrued
expenses and finance lease liabilities arise directly from and are used to facilitate its daily
operations.
The BOD has the overall responsibility for the establishment and oversight of the risk
management framework of the Group. The BOD has established the Risk Management
Committee, which is responsible for developing and monitoring the risk management
policies. The committee reports regularly to the BOD on its activities.

F-79

The risk management policies of the Group are established to identify and analyze the
risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks
and adherence to limits. Risk management policies and systems are reviewed regularly to
reflect changes in market conditions and activities. The Group, through its training and
management standards and procedures, aims to develop a disciplined and constructive
control environment in which all employees understand their roles and obligations.
The BOD oversees how management monitors compliance with SMCs risk management
policies and procedures, and reviews the adequacy of the risk management framework in
relation to the risks faced by the Group. The BOD is assisted in its oversight role by
SMCs Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk
management controls and procedures, the results of which are reported to the BOD.
Interest Rate Risk
Interest rate risk is the risk that future cash flows from a financial instrument (cash flow
interest rate risk) or its fair value (fair value interest rate risk) will fluctuate because of
changes in market interest rates. The Groups exposure to changes in interest rates relates
primarily to the long-term borrowings. Borrowings issued at fixed rates expose the Group
to fair value interest rate risk. On the other hand, borrowings issued at variable rates
expose the Group to cash flow interest rate risk.
Management is responsible for monitoring the prevailing market-based interest rate and
ensures that the mark-up rates charged on its borrowings are optimal and benchmarked
against the rates charged by other creditor banks.
On the other hand, the investment policy of the Group is to maintain an adequate yield to
match or reduce the net interest cost from its borrowings pending the deployment of
funds to their intended use in the operations and working capital management. However,
the Group invests only in high-quality short-term investments while maintaining the
necessary diversification to avoid concentration risk.
In managing interest rate risk, the Group aims to reduce the impact of short-term
fluctuations on the earnings. Over the longer term, however, permanent changes in
interest rates would have an impact on profit or loss.
The management of interest rate risk is also supplemented by monitoring the sensitivity
of the Groups financial instruments to various standard and non-standard interest rate
scenarios. Interest rate movements affect reported equity from increases or decreases in
interest income or interest expense as well as fair value changes reported in profit or loss,
if any.
The sensitivity to a reasonably possible 1% increase in the interest rates, with all other
variables held constant, would have decreased the Groups profit before tax (through the
impact on floating rate borrowings) by P2,092 and P6,388 in 2015 and 2014,
respectively. A 1% decrease in the interest rate would have had the equal but opposite
effect. These changes are considered to be reasonably possible given the observation of
prevailing market conditions in those periods. There is no impact on the Groups equity.

F-80

Interest Rate Risk Table


The terms and maturity profile of the interest-bearing financial instruments, together with
its gross amounts, are shown in the following tables:
December 31, 2015
Fixed Rate
Philippine peso-denominated
Step-down interest rate
Philippine peso-denominated
Step-down interest rate
Foreign currency-denominated
(expressed in Philippine peso)
Interest rate
Floating Rate
Foreign currency-denominated
(expressed in Philippine peso)
Interest rate

December 31, 2014


Fixed Rate
Philippine peso-denominated
Step-down interest rate
Philippine peso-denominated
Step-down interest rate
Foreign currency-denominated
(expressed in Philippine peso)
Interest rate
Floating Rate
Foreign currency-denominated
(expressed in Philippine peso)
Interest rate

<1 Year

1-2 Years

>2-3 Years

>3-4 Years

>4-5 Years

>5 Years

Total

P1,402,200
6.0606%
171,000
6.2921%

P1,402,200
6.0606%
171,000
6.2921%

P1,402,200
6.0606%
171,000
6.2921%

P1,402,200
6.0606%
171,000
6.2921%

P1,402,200
6.0606%
171,000
6.2921%

P3,892,950
6.0606%
474,750
6.2921%

P10,903,950
1,329,750
-

14,118,000
7%

32,942,000
LIBOR +
Margin

14,118,000

32,942,000

P15,691,200

P1,573,200

P34,515,200

P1,573,200

P1,573,200

P4,367,700

P59,293,700

<1 Year

1-2 Years

>2-3 Years

>3-4 Years

>4-5 Years

>5 Years

Total

P1,223,850
6.0606%
149,250
6.2921%

P1,402,200
6.0606%
171,000
6.2921%

P1,402,200
6.0606%
171,000
6.2921%

P1,402,200
6.0606%
171,000
6.2921%

P1,402,200
6.0606%
171,000
6.2921%

P5,295,150
6.0606%
645,750
6.2921%

P12,127,800
1,479,000
-

13,416,000
7%

P1,373,100

P14,989,200

22,360,000
LIBOR +
Margin

P1,573,200

P23,933,200

13,416,000

22,360,000

P1,573,200

P5,940,900

P49,382,800

Foreign Currency Risk


The exposure to foreign currency risk results from significant movements in foreign
exchange rates that adversely affect the foreign currency-denominated transactions of the
Group. The risk management objective with respect to foreign currency risk is to reduce
or eliminate earnings volatility and any adverse impact on equity.
Information on the Groups foreign currency-denominated monetary assets and monetary
liabilities and their Philippine peso equivalents as of December 31 are as follows:
2014

2015

Assets
Cash and cash equivalents
Trade and other receivables

Liabilities
Accounts payable and
accrued expenses
Finance lease liabilities
Long-term debt

Net foreign currencydenominated monetary


liabilities

US Dollar

Peso
Equivalent

Note

US Dollar

Peso
Equivalent

8
9

US$210,578
81,746

P9,909,822
3,846,983

US$260,178
83,937

P11,635,160
3,753,513

292,324

13,756,805

344,115

15,388,673

278,830
2,057,616
1,000,000

13,121,735
96,831,429
47,060,000

148,277
2,216,978
800,000

6,633,727
99,143,266
35,776,000

3,336,446

157,013,164

3,165,255

141,552,993

US$3,044,122

P143,256,359

US$2,821,140

P126,164,320

16
7
7, 17

F-81

The Group reported net unrealized foreign exchange losses amounting to P7,505,369,
P1,584,500 and P9,592,617 in 2015, 2014 and 2013, respectively, with the translation of
its foreign currency-denominated assets and liabilities. These mainly resulted from the
movement of the Philippine peso against US dollar as shown in the following table:
US Dollar
to Philippine Peso
P47.060
44.720
44.395

December 31, 2015


December 31, 2014
December 31, 2013

The management of foreign currency risk is also supplemented by monitoring the


sensitivity of the Groups financial instruments to various foreign currency exchange rate
scenarios. Foreign exchange movements affect reported equity from increases or
decreases in unrealized and realized foreign exchange gains or losses.
The following table demonstrates the sensitivity to a reasonably possible change in the
US dollar exchange rate, with all other variables held constant, of the Groups profit
before tax (due to changes in the fair value of monetary assets and monetary liabilities)
for the years ended December 31:
2015
P1 Decrease in
P1 Increase in
the US Dollar
the US Dollar
Exchange Rate Exchange Rate
Cash and cash equivalents
Trade and other receivables

Accounts payable and


accrued expenses
Finance lease liabilities
Long-term debt

2014
P1 Decrease in
P1 Increase in
the US Dollar
the US Dollar
Exchange Rate
Exchange Rate

(P210,578)
(81,746)

P210,578
81,746

(P260,178)
(83,937)

P260,178
83,937

(292,324)

292,324

(344,115)

344,115

278,830
2,057,616
1,000,000

(278,830)
(2,057,616)
(1,000,000)

148,277
2,216,978
800,000

(148,277)
(2,216,978)
(800,000)

3,336,446

(3,336,446)

3,165,255

(3,165,255)

P3,044,122

(P3,044,122)

P2,821,140

(P2,821,140)

Exposures to foreign exchange rates vary during the year depending on the volume of
foreign currency-denominated transactions. Nonetheless, the analysis above is considered
to be representative of the Groups foreign currency risk.
Liquidity Risk
Liquidity risk pertains to the risk that the Group will encounter difficulty to meet
payment obligations when they fall under normal and stress circumstances.
The Groups objectives to manage its liquidity risk are as follows: a) to ensure that
adequate funding is available at all times; b) to meet commitments as they arise without
incurring unnecessary costs; c) to be able to access funding when needed at the least
possible cost; and d) to maintain an adequate time spread of refinancing maturities.
The Group constantly monitors and manages its liquidity position, liquidity gaps and
surplus on a daily basis. A committed stand-by credit facility from several local banks is
also available to ensure availability of funds when necessary.

F-82

The table below summarizes the maturity profile of the Groups financial assets and
financial liabilities based on contractual undiscounted receipts and payments used for
liquidity management as of December 31:
2015
Financial Assets
Cash and cash equivalents
Trade and other receivables - net*
Restricted cash (included under
Other noncurrent assets
account - net)
Noncurrent receivable
(included under Other
noncurrent assets - net
account)
Financial Liabilities
Accounts payable and accrued
expenses*
Finance lease liabilities
(including current portion)
Long-term debt - net (including
current maturities)

Carrying
Amount

Contractual
Cash Flow

1 Year
or Less

P22,241,361
18,473,455

P22,241,361
18,473,455

P22,241,361
18,473,455

P -

P -

P -

1,311,740

1,311,740

1,311,740

253,812

253,812

26,418

87,735

27,707,659

27,707,659

27,707,659

179,193,193

231,795,506

23,755,535

24,016,154

77,763,868

106,259,949

58,607,861

59,293,700

15,691,200

1,573,200

37,661,600

4,367,700

Carrying
Amount

Contractual
Cash Flow

1 Year
or Less

>1 Year 2 Years

>2 Years 5 Years

Over
5 Years

P38,304,294
18,208,290

P38,304,294
18,208,290

P38,304,294
18,208,290

P -

P -

P -

1,054,801

1,054,801

1,054,801

179,129

179,129

22,520,871

22,520,871

22,520,871

186,303,745

248,175,447

22,091,404

23,170,046

71,935,991

130,978,006

48,713,245

49,382,800

1,373,100

14,989,200

27,079,600

5,940,900

>1 Year 2 Years

>2 Years 5 Years

Over
5 Years

139,659

*Excluding statutory receivables and payables

2014
Financial Assets
Cash and cash equivalents
Trade and other receivables - net*
Restricted cash (included under
Other noncurrent assets net account)
Noncurrent receivable
(included under Other
noncurrent assets - net
account)
Financial Liabilities
Accounts payable and accrued
expenses*
Finance lease liabilities
(including current portion)
Long-term debt - net (including
current maturities)

179,129

*Excluding statutory receivables and payables

Credit Risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a
financial instrument fails to meet its contractual obligations, and arises principally from
the trade and other receivables. The Group manages its credit risk mainly through the
application of transaction limits and close risk monitoring. It is the Groups policy to
enter into transactions with a wide diversity of creditworthy customer or counterparty to
mitigate any significant concentration of credit risk.
The Group has regular internal control reviews to monitor the granting of credit and
management of credit exposures. Where appropriate, the Group obtains collateral or
arranges master netting agreements.
Trade and Other Receivables
The exposure to credit risk is influenced mainly by the individual characteristics of each
customer or counterparty. However, management also considers the demographics of the
Groups customer base, including the default risk of the industry in which customers or
counterparties operate, as these factors may have an influence on the credit risk.

F-83

The Group has established a credit policy under which each new customer or
counterparty is analyzed individually for creditworthiness before the standard payment
terms and conditions are offered. The Group ensures that sales on account are made to
customers with appropriate credit history. The Group has detailed credit criteria and
several layers of credit approval requirements before engaging a particular customer or
counterparty. The review includes external ratings, when available, and in some cases
bank references. Purchase limits are established for each customer and are reviewed on a
regular basis. Customers that fail to meet the benchmark creditworthiness may transact
with the Group only on a prepayment basis.
The Group establishes an allowance for impairment losses that represents its estimate of
incurred losses in respect of trade and other receivables. The main components of this
allowance include a specific loss component that relates to individually significant
exposures, and, as applicable, a collective loss component established for groups of
similar assets in respect of losses that have been incurred but not yet identified. The
collective loss allowance is determined based on historical data of payment statistics for
similar financial assets.
Financial information on the Groups maximum exposure to credit risk as of
December 31, without considering the effects of collaterals and other risk mitigation
techniques, is presented below.

Cash and cash equivalents


(excluding cash on hand)
Trade and other receivables - net*
Restricted cash
Noncurrent receivable

2015

2014

P22,240,755
18,473,455
1,311,740
253,812
P42,279,762

P38,303,999
18,208,290
1,054,801
179,129
P57,746,219

*Excluding statutory receivables

The credit risk for cash and cash equivalents is considered negligible, since the
counterparties are reputable entities with high quality external credit ratings.
The Group has no significant concentration of credit risk since the Group deals with a
large number of homogeneous trade customers. The Group does not execute any credit
guarantee in favor of any counterparty.
Capital Management
The Group maintains a sound capital base to ensure its ability to continue as a going
concern, thereby continue to provide returns to stockholders and benefits to other
stockholders and to maintain an optimal capital structure to reduce cost of capital.
The Group manages its capital structure and makes adjustments in the light of changes in
economic conditions. To maintain or adjust the capital structure, the Group may adjust
the dividend payment to shareholders, distribution payment, pay-off existing debts, return
capital to shareholders or issue new shares, subject to compliance with certain covenants
of its long-term debt and USCS (Notes 17 and 20).
The Group defines capital as capital stock, additional paid-in capital, USCS and retained
earnings, both appropriated and unappropriated.

F-84

The BOD has overall responsibility for monitoring capital in proportion to risk. Profiles
for capital ratios are set in the light of changes in the external environment and the risks
underlying the Groups business, operation and industry.
The Group monitors capital on the basis of debt-to-equity ratio, which is calculated as
total debt divided by total equity. Total debt is defined as total current liabilities and total
noncurrent liabilities, while equity is total equity as shown in the consolidated statements
of financial position.

27. Financial Assets and Financial Liabilities


The table below presents a comparison by category of the carrying amounts and fair
values of the Groups financial instruments as of December 31:
2014

2015

Financial Assets
Cash and cash equivalents
Trade and other receivables - net*
Restricted cash (included under
Other noncurrent assets - net
account)
Noncurrent receivable (included
under Other noncurrent
assets - net account)

Financial Liabilities
Accounts payable and accrued
expenses*
Finance lease liabilities
(including current portion)
Long-term debt - net (including
current maturities)

Fair Value

Carrying
Amount

Fair Value

P22,241,361
18,473,455

P22,241,361
18,473,455

P38,304,294
18,208,290

P38,304,294
18,208,290

1,311,740

1,311,740

1,054,801

1,054,801

Carrying
Amount

253,812

253,812

179,129

179,129

P42,280,368

P42,280,368

P57,746,514

P57,746,514

P27,707,659

P27,707,659

P22,520,871

P22,520,871

179,193,193

179,193,193

186,303,745

186,303,745

58,607,861

59,760,982

48,713,245

51,311,719

P265,508,713

P266,661,834

P257,537,861

P260,136,335

*Excluding statutory receivables and payables

The following methods and assumptions are used to estimate the fair value of each class
of financial instruments:
Cash and Cash Equivalents, Trade and Other Receivables (excluding statutory
receivables), Restricted Cash, Noncurrent Receivable, Accounts Payable and Accrued
Expenses (excluding statutory payables). The carrying amounts of these financial assets
and financial liabilities approximate fair values primarily due to the relatively short-term
nature/maturities of these financial instruments. The fair value of noncurrent receivable
is based on the present value of expected future cash flows using the applicable discount
rates based on current market rates of identical or similar quoted instruments.
Long-term Debt. The fair value of interest-bearing fixed-rate loans is based on the
discounted value of expected future cash flows using the applicable market rates for
similar types of instruments as of reporting date. The discount rates used for Philippine
peso-denominated loans range from 2.39% to 4.57% and from 2.54% to 4.29% as of
December 31, 2015 and 2014, respectively. The discount rates used for foreign
currency-denominated loans is 0.43% and range from 0.17% to 0.63% as of
December 31, 2015 and 2014, respectively. The carrying amounts of floating rate loans
with quarterly interest rate repricing approximate their fair values.

F-85

The fair value of the long-term debt was categorized as Level 2 in the fair value hierarchy
based on inputs other than quoted prices included within Level 1 that are observable at
the reporting date. The Group has no financial instruments valued based on Level 1 and
Level 3 as of December 31, 2015 and 2014. During the year, there were no transfers
between Level 1 and Level 2 fair value measurements, and no transfers into and out of
Level 3 fair value measurements.
Finance Lease Liabilities. The fair value is based on the present value of expected cash
flows using the applicable discount rates based on current market rates of similar
instruments.

28. Other Matters


a. Contingencies
The Group is a party to certain cases or claims which are either pending decision by
the court/regulators or are subject to settlement agreements. The outcome of these
cases or claims cannot be presently determined (Note 4).
b. Generation Payments to PSALM
SPPC and PSALM are parties to the Ilijan IPPA Agreement covering the
appointment of SPPC as the IPP Administrator of the Ilijan Power Plant.
SPPC and PSALM have an ongoing dispute arising from differing interpretations of
certain provisions related to generation payments under the Ilijan IPPA Agreement.
As a result of such dispute, the parties have arrived at different computations
regarding the subject payments. In a letter dated August 6, 2015, PSALM has
demanded payment of the difference between the generation payments calculated
based on its interpretation and the amount which has already been paid by SPPC,
plus interest, covering the period December 26, 2012 to April 25, 2015.
On August 12, 2015, SPPC initiated a dispute resolution process with PSALM as
provided under the terms of the Ilijan IPPA Agreement, while continuing to maintain
that it has fully paid all of its obligations to PSALM. Notwithstanding the bona fide
dispute, PSALM issued a notice terminating the Ilijan IPPA Agreement on
September 4, 2015. On the same day, PSALM also called on the Performance Bond
posted by SPPC pursuant the Ilijan IPPA Agreement.
On September 8, 2015, SPPC filed a Complaint with the Regional Trial Court of
Mandaluyong City. In its Complaint, SPPC requested the Court that its interpretation
of the relevant provisions of the Ilijan IPPA Agreement be upheld. The Complaint
also asked that a 72-hour Temporary Restraining Order (TRO) be issued against
PSALM for illegally terminating the Ilijan IPPA Agreement and drawing on the
Performance Bond. On even date, the Court issued a 72-hour TRO which prohibited
PSALM from treating SPPC as being in Administrator Default and from performing
other acts that would change the status quo ante between the parties before PSALM
issued the termination notice and drew on the Performance Bond. The TRO was
extended for until September 28, 2015.
On September 28, 2015, the Court issued an Order granting a Preliminary Injunction
enjoining PSALM from proceeding with the termination of the Ilijan IPPA
Agreement while the main case is pending.

F-86

On October 22, 2015, the Court also issued an Order granting the Motion for
Intervention and Motion to Admit Complaint-in-intervention by Meralco. Currently
pending for resolution of the Court are: 1) PSALMs Motion for Reconsideration of
the Order granting the Preliminary Injunction; and 2) PSALMs Motion to Dismiss.
The preliminary conference among the parties scheduled on February 18, 2016 was
reset on April 14, 2016.
Meanwhile, there are no restrictions or limitations on the ability of SPPC to supply
power from the Ilijan Power Plant to Meralco under its Power Supply Agreement
with the latter.
By virtue of the Preliminary Injunction issued by the Court, SPPC continues to be the
IPP Administrator for the Ilijan Power Plant.
c. Criminal Cases Filed by SPPC and SMEC
On September 29, 2015, SPPC filed a criminal complaint for estafa and for violation
of Section 3(e) of RA No. 3019, otherwise known as the Anti-Graft and Corrupt
Practices Act, before the Department of Justice (DOJ), against certain officers of
PSALM, in connection with the termination of SPPCs IPPA Agreement, which was
made by PSALM with manifest partiality and evident bad faith. Further, PSALM
fraudulently misrepresented its entitlement to draw on the Performance Bond posted
by SPPC, resulting in actual injury to SPPC in the amount of US$60,000. The case is
still pending with the DOJ as of December 31, 2015.
On October 21, 2015, SMEC filed a criminal complaint for Plunder and violation of
Section 3(e) and 3(f) of RA 3019, before the DOJ against a certain officer of
PSALM, and certain officers of TPEC and TSC, relating to the illegal grant of the
so-called "excess capacity" of the Sual Power Plant in favor of TPEC which enabled
it to receive a certain amount at the expense of the Government and SMEC. The case
is still pending with the DOJ as of December 31, 2015.
d. Temporary Restraining Order Issued to Meralco
On December 23, 2013, the Supreme Court (SC) issued a TRO, effective
immediately, preventing Meralco from collecting from its customers the power rate
increase pertaining to November 2013 billing. As a result, Meralco was constrained
to fix its generation rate to its October 2013 level of P5.67/kWh. Claiming that since
the power supplied by generators, including SMEC and SPPC is billed to Meralco's
customers on a pass-through basis, Meralco deferred a portion of its payment on the
ground that it was not able to collect the full amount of its generation cost. Further,
on December 27, 2013, the DOE, the ERC and PEMC, acting as a tripartite
committee, issued a joint resolution setting a reduced price cap on the WESM of
P32/kWh. The price will be effective for 90 days until a new cap is decided upon.
On January 16, 2014, the SC granted Meralcos plea to include other power supplier
and generation companies, including SMEC and SPPC, as respondents to an inquiry.
On February 18, 2014, the SC extended the period of the TRO until April 22, 2014
and enjoined the respondents (PEMC and the generators) from demanding and
collecting the deferred amounts.

F-87

On March 3, 2014, the ERC issued an order declaring the November and December
2013 Luzon WESM prices void and imposed the application of regulated prices.
Accordingly, SMEC, SPPC and SPDC recognized a reduction in the sale of power
while SMELC recognized a reduction in its power purchases. Consequently, a
payable and receivable were also recognized for the portion of over-collection or
over-payment. The settlement of which shall be covered by a 24-month Special
Payment Arrangement (SPA) agreed with PEMC which took effect in June 2014 up
to May 2016. On June 26, 2014, SMEC, SPPC and SPDC filed with the Court of
Appeals a Petition for Review of these orders. The case is still pending resolution
with the Court as of December 31, 2015.
e. Commitments
The outstanding purchase commitments of the Group amounted to P2,577,051 and
P4,581,000 as of December 31, 2015 and 2014, respectively.
Amount authorized but not yet disbursed for capital projects as of December 31,
2015 and 2014 is approximately P32,704,535 and P39,379,030, respectively.
f.

Electric Power Industry Reform Act of 2001


The EPIRA sets forth the following: (a) Section 49 created PSALM to take
ownership and manage the orderly sale, disposition and privatization of all existing
NPC generation assets, liabilities, IPP contracts, real estate and all other disposable
assets; (b) Section 31(c) requires the transfer of the management and control of at
least 70% of the total energy output of power plants under contract with NPC to the
IPP Administrators as one of the conditions for retail competition and open access;
and (c) Pursuant to Section 51(c), PSALM has the power to take title to and
possession of the IPP contracts and to appoint, after a competitive, transparent and
public bidding, qualified independent entities who shall act as the IPP Administrators
in accordance with the EPIRA. In accordance with the bidding procedures and
supplemented bid bulletins thereto to appoint an IPP Administrator relative to the
capacity of the IPP contracts, PSALM has conducted a competitive, transparent and
open public bidding process following which the Group was selected winning bidder
of the IPPA Agreements discussed in Note 7.
The EPIRA requires generation and distribution utility (DU) companies to undergo
public offering within 5 years from the effective date, and provides cross ownership
restrictions between transmission and generation companies. If the holding company
of generation and DU companies is already listed with the PSE, the generation
company or the DU need not comply with the requirement since such listing of the
holding company is deemed already as compliance with the EPIRA.
A DU is allowed to source from an associated company engaged in generation up to
50% of its demand except for contracts entered into prior to the effective date of the
EPIRA. Generation companies are restricted from owning more than 30% of the
installed generating capacity of a grid and/or 25% of the national installed generating
capacity. The Group is in compliance with the restrictions as of December 31, 2015.

g. US$400,000 Facility Agreement


On December 29, 2015, SCPC signed a US$400,000, 7-year term loan with a
syndicate of banks. Pursuant to the Facility Agreement, the amount of the loan will
bear interest at the rate of the LIBOR plus a margin, payable in arrears on the last day
of the agreed interest period. On March 8, 2016, an initial drawdown amount of
US$250,000 was made from the Facility Agreement. Repayment of the loan principal
shall commence on October 31, 2017, and every three months thereafter.

F-88

The Facility Agreement imposes a number of covenants on the part of SCPC


including, but not limited to, maintaining a leverage ratio throughout the duration of
the term of the Facility Agreement. The terms and conditions of the Facility
Agreement contains a negative pledge provision with certain limitations on the
ability of SCPC to create or have outstanding any security interest upon or with
respect to any of the assets or revenues of SCPC to secure any indebtedness, subject
to certain exceptions.
h. Subsequent Events
On January 14, 2016, the Parent Company has entered into a US$300,000, 6-month
term loan with a local bank. The full amount of loan was drawn on January 25, 2016.
Proceeds from loan were used to pay the US$300,000, 7%, 5-year note on
January 26, 2016.

29. Reclassification of Account


The Parent Company and SMEC reclassified the accrual for defined benefit obligation in
the 2014 and 2013 consolidated financial statements to conform to the 2015 presentation.
The effect of the reclassification follows:

Account Description

As Previously
Reported

December 31, 2014


Reclassification
As
Add (Deduct)
Restated

As Previously
Reported

P28,117,804

(P16,692) P28,101,112

P22,971,933

December 31, 2013


Reclassification
Add (Deduct)

As
Restated

Consolidated
Statements of
Financial Position
Current Liabilities
Accounts payable and
accrued expenses
Noncurrent
Liabilities
Other noncurrent
liabilities

670,486

(P7,714) P22,964,219

16,692

687,178

7,714

7,714

8,978

8,978

7,714

7,714

Consolidated
Statements of Cash
Flows
Cash Flows from
Operating
Activities
Retirement benefit
expense
Increase in accounts
payable and accrued
expenses

5,145,871

(8,978)

5,136,893

3,128,087

(7,714)

3,120,373

The Group believes that the presentation of a third statement of financial position as of
January 1, 2014 is not relevant as the adjustment has no significant effect on the
consolidated statement of financial position as of January 1, 2014.

F-89

F-90

F-91

F-92

F-93

F-94

F-95

F-96

F-97

F-98

F-99

F-100

F-101

F-102

F-103

F-104

F-105

F-106

F-107

F-108

F-109

F-110

F-111

F-112

F-113

F-114

F-115

THE ISSUER
SMC Global Power Holdings Corp.
155 EDSA, Wack-Wack
Mandaluyong City
Philippines

TRUSTEE

REGISTRAR AND PAYING AGENT

Philippine National Bank Trust Banking Group


Fiduciary Services Division
Philippine National Bank, 3rd Floor, PNB Financial
Center, Pres. Diosdado Macapagal Blvd., Pasay
City, Metro Manila 1300 Philippines

Philippine Depository & Trust Corp.


37th Floor, Tower 1, The Enterprise Center
6786 Ayala Avenue corner Paseo de Roxas
Makati City 1226
Philippines

LEGAL ADVISORS
To the Joint Issue Managers, Joint Lead
Underwriters and Bookrunners

To the Issuer

SyCip Salazar Hernandez & Gatmaitan


SyCipLaw Center
105 Paseo de Roxas
Makati City 1226
Metro Manila
Philippines

Picazo Buyco Tan Fider & Santos


18th, 19th and 17th Floors, Liberty Center
104 H.V. dela Costa Street
Salcedo Village, Makati City
Philippines

AUDITORS OF THE ISSUER


R.G. Manabat & Co., a member firm of KPMG
9th Floor, The KPMG Center
6787 Ayala Avenue
Makati City 1226
Philippines

LISTING AGENT
Philippine Dealing & Exchange Corp.
37th Floor, Tower 1, The Enterprise Center
6786 Ayala Avenue corner Paseo de Roxas
Makati City 1226
Philippines

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